An Empirical Analysis of Stock and Bond Market Liquidity

Abstract

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Does the Euro affect the dynamic relation between stock market liquidity and the business cycle?

“…In fact as documented by Chordia, Sarkar, & Subrahmanyam (2005) who argue that -We also find that substantial commonality between stock and bond market liquidity continues to exist even at longer horizons; unexpected shocks to these variables are significantly and positively cross-correlated even at biweekly and monthly frequencies.‖ p 125. Therefore, in line with Chordia, Sarkar, & Subrahmanyam (2005), our methodology allows us to connect between microstructure liquidity and macro-liquidity (in light of fund flows between sectors of the macro-economy). The methodology to aggregate our proxies in this study does not differ from what Chordia, Sarkar, & Subrahmanyam (2005) in which authors computed daily spread are averaged within the day for each stock, then averaged value-weighted across stocks (with market capitalization of the end of the previous year used to calculate weights) to obtain the aggregate market liquidity measures.…”

“…We calculate different liquidity measures for each stock, and then take the equally weighted average across stocks in the index to proxy the liquidity measure for each country. Our study builds on the empirical framework of past studies specifically Naes, Skjeltorp, & Odegaard (2011) and Chordia, Sarkar, & Subrahmanyam (2005) thus we deem that the choice of the frequency is not problematic to our empirical examination. In fact as documented by Chordia, Sarkar, & Subrahmanyam (2005) who argue that -We also find that substantial commonality between stock and bond market liquidity continues to exist even at longer horizons; unexpected shocks to these variables are significantly and positively cross-correlated even at biweekly and monthly frequencies.‖ p 125.…”

“…Our study builds on the empirical framework of past studies specifically Naes, Skjeltorp, & Odegaard (2011) and Chordia, Sarkar, & Subrahmanyam (2005) thus we deem that the choice of the frequency is not problematic to our empirical examination. In fact as documented by Chordia, Sarkar, & Subrahmanyam (2005) who argue that -We also find that substantial commonality between stock and bond market liquidity continues to exist even at longer horizons; unexpected shocks to these variables are significantly and positively cross-correlated even at biweekly and monthly frequencies.‖ p 125. Therefore, in line with Chordia, Sarkar, & Subrahmanyam (2005), our methodology allows us to connect between microstructure liquidity and macro-liquidity (in light of fund flows between sectors of the macro-economy).…”

Illiquidity Transmission in a Three-Country Framework: A Conditional Approach

“…The relation between liquidity of different U.S. markets is studied as well. Chordia et al (2005) and Goyenko and Ukhov (2009) examine the linkage between the stock and bond market using a vector autoregression model and Pu (2009) finds a strong commonality in liquidity between the credit default swap (CDS) and U.S. corporate bond market. In contrast, our focus is on international spillovers which reveals interesting insights.…”

“…1 Third, we contribute to the literature on the different behavior of liquidity in times of stress (see Brunnermeier and Pedersen 2009). So far, in the empirical literature, crises are often specified exogenously based on the identification of events (e.g., Chordia et al 2005) or following definitions of economic research organizations 2 (e.g., Goyenko et al 2011) and incorporated into the model via dummy variables. More recently, regimes are determined by the data (e.g., Acharya et al 2013;Ilerisoy et al 2014;Schuster and Uhrig-Homburg 2015) but none of those studies examines the transmission of liquidity between different countries.…”