Emerging Market Liquidity and Crises
Eduardo Levy Yeyati (),
Sergio Schmukler () and
Neeltje Van Horen ()
Journal of the European Economic Association, 2008, vol. 6, issue 2-3, 668-682
Whereas conventional wisdom argues that markets shut down during crises, with sellers struggling to find buyers, we find that markets continue to operate during financial turmoil, even in narrow and volatile emerging economies. Simple event studies indicate that both trading volume and trading costs increase in crisis times. Prices change more with each dollar transacted (pushing the Amihud illiquidity measure up) and bid-ask spreads widen. More generally, econometric estimates show that large price downturns, typical of crises, are associated with higher trading activity and increased trading costs, with trading activity declining only later as crises progress. Thus, although trading activity tends to be negatively related to trading costs during tranquil times (and across securities), this relation appears to break down during crises. These results are consistent with the analytical literature on portfolio rebalancing by heterogeneous agents in times of crises. (JEL: F30, G10, G12, G14) (c) 2008 by the European Economic Association.
JEL-codes: F30 G10 G12 G14 (search for similar items in EconPapers)
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