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

Helena Chuliá, Christoph Koser and Jorge Uribe

International Review of Financial Analysis, 2020, vol. 69, issue C

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 (search for similar items in EconPapers)
JEL-codes: C10 C32 G01 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (6)

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Working Paper: Uncovering the time-varying relationship between commonality in liquidity and volatility (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:69:y:2020:i:c:s1057521920301101

DOI: 10.1016/j.irfa.2020.101466

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