Stock price synchronicity and liquidity

Kalok Chan, Allaudeen Hameed and Wenjin Kang

Journal of Financial Markets, 2013, vol. 16, issue 3, 414-438

Abstract: We argue and provide evidence that stock price synchronicity affects stock liquidity. Under the relative synchronicity hypothesis, higher return co-movement (i.e., higher systematic volatility relative to total volatility) improves liquidity. Under the absolute synchronicity hypothesis, stocks with higher systematic volatility or beta are more liquid. Our results support both hypotheses. We find all three illiquidity measures (effective proportional bid-ask spread, price impact measure, and Amihud's illiquidity measure) are negatively related to stock return co-movement and systematic volatility. Our analysis also shows that larger industry-wide component in returns improves liquidity. We find that improvement in liquidity following additions to the S&P 500 Index is related to the stock's increase in return co-movement.

Keywords: Liquidity; Price synchronicity; Systematic volatility (search for similar items in EconPapers)
JEL-codes: G19 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (47)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:16:y:2013:i:3:p:414-438

DOI: 10.1016/j.finmar.2012.09.007

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