An Empirical Study on Stock Market Decline and Liquidity: Evidence from 46 Countries
Date Issued
2016
Date
2016
Author(s)
Hsiao, Hsiang-Wen
Abstract
This paper adopts the theoretical framework of Hameed, Kang, and Viswanathan (2010) while employing Amihud’s (2002) illiquidity ratio to measure overall market’s liquidity. This empirical study examines the impact of market returns on liquidity provision in 46 countries and the prediction that liquidity levels would respond asymmetrically to positive and negative market returns. Moreover, this paper investigates the relationship between overall liquidity and funding constraints when market declines. The empirical results indicate negative market returns have much more stronger influence on market liquidity than positive market returns. Liquidity dry-ups following market declines are related to tightness in funding liquidity in some countries. On the other hand, changes in market liquidity are sensitive to higher volatility, particularly following periods of market declines. Meanwhile, this paper also suggests country market liquidity is positively related to the overall liquidity in the world, exhibiting the phenomenon of commonality in liquidity.
Subjects
liquidity
illiquidity ratio
market decline
funding constraint
volatility
liquidity commonality
Type
thesis