Uncovering the time-varying relationship between commonality in liquidity and volatility

Helena Chuliá, Christoph Koser () and Jorge Uribe
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Christoph Koser: Department of Econometrics, University of Barcelona. Av. Diagonal, 690, 08034. Barcelona, Spain.

No 201916, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

Abstract: This study examines the dynamic linkages between commonality in liquidity in international stock markets and market volatility. Using a recently proposed liquidity measure as input in a variance decomposition exercise, we show that innovations to liquidity in most markets are induced predominately by inter-market innovations. We also find that commonality in liquidity peaks immediately after large market downturns, coinciding with periods of crisis. The results from a dynamic Granger causality test indicate that the relationship between commonality in liquidity and market volatility is bi-directional and time-varying. We show that while volatility Granger-causes commonality in liquidity throughout the entire sample period, market volatility is enhanced by commonality in liquidity only in sub-periods. Our results are helpful for practitioners and policy makers.

Keywords: Systemic Liquidity; Market Liquidity; Spillover Index; Granger Causality; Financial Crisis; Variance Decomposition. JEL classification:C10; C32; G01; G15. (search for similar items in EconPapers)
Pages: 24 pages
Date: 2019-09, Revised 2019-09
New Economics Papers: this item is included in nep-rmg
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http://www.ub.edu/irea/working_papers/2019/201916.pdf (application/pdf)

Related works:
Journal Article: Uncovering the time-varying relationship between commonality in liquidity and volatility (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ira:wpaper:201916

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