Market volatility and stock returns: The role of liquidity providers

Kee H. Chung and Chairat Chuwonganant

Journal of Financial Markets, 2018, vol. 37, issue C, 17-34

Abstract: This study shows that market volatility affects stock returns both directly and indirectly through its impact on liquidity provision. The negative relation between market volatility and stock returns arises not only from greater risk premiums but also greater illiquidity premiums that are associated with higher market volatility. Consistent with our expectation, we also find that stock returns are more sensitive to volatility shocks in the high-frequency trading era, and after the regulatory changes in the U.S. markets that increased competition between public traders and market makers, reduced the tick size, and decreased the role of market makers.

Keywords: Risk premium; Illiquidity premium; VIX; Market structure (search for similar items in EconPapers)
JEL-codes: G01 G02 G10 G18 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:37:y:2018:i:c:p:17-34

DOI: 10.1016/j.finmar.2017.07.002

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