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Commonality in liquidity in emerging markets: Another supply-side explanation

Min Bai and Yafeng Qin ()

International Review of Economics & Finance, 2015, vol. 39, issue C, 90-106

Abstract: Emerging markets share many distinct features that separate them from more developed markets, including low liquidity and high commonality in liquidity. This study on 18 emerging markets finds that individual stock liquidity is more affected by systematic volatility than by idiosyncratic volatility, suggesting that higher commonality in liquidity in emerging markets could be caused by higher co-variation in stock volatility and co-variation in inventory risk. Consistent with this conjecture, commonality in liquidity is found to be positively related to co-movement in volatility, and negatively related to the level of development of the financial markets. This study also documents that liquidity co-movement across emerging markets has a strong geographic component and is related to a correlation in market-wide volatility. The results do not support the presence of a global liquidity factor, and suggest that liquidity risk can be diversified by constructing global portfolios.

Keywords: Commonality; Liquidity; Emerging markets (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2015
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