The Cross-Section of Daily Variation in Liquidity

Tarun Chordia, Lakshmanan Shivakumar and Avanidhar Subrahmanyam
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Tarun Chordia: Goizueta Business School, Emory University, USA
Lakshmanan Shivakumar: London Business School, UK
Avanidhar Subrahmanyam: The Anderson School, University of California at Los Angeles, USA

Chapter 5 in Advances in Quantitative Analysis of Finance and Accounting:Essays in Microstructure in Honor of David K Whitcomb, 2006, pp 75-110 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn this paper, we analyze cross-sectional heterogeneity in the time-series variation of liquidity in equity markets. Our analysis uses a broad time-series and cross-section of liquidity data. We find that average daily changes in liquidity exhibit significant heterogeneity in the cross-section; the liquidity of small firms varies more on a daily basis than that of large firms. A steady increase in aggregate market liquidity over the past decade is more strongly manifest in large firms than in small firms. Absolute stock returns are an important determinant of liquidity. We investigate cross-sectional differences in the resilience of a firm's liquidity to information shocks. We use the sensitivity of stock liquidity to absolute stock returns as an inverse measure of this resilience, and find that the measure exhibits considerable cross-sectional variation. Firm size, return volatility, institutional holdings, and volume are all significant cross-sectional determinants of this measure.

Keywords: Liquidity; Volatility; Limit Orders; Microstructure; Trading Structure (search for similar items in EconPapers)
Date: 2006
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