Liquidity and conditional market returns: Evidence from German exchange traded funds

The aim of this paper is to analyze the dynamic evolution of six liquidity proxies on time and to find their causality with the French CAC 40 stock market index returns, over the period from January 2007 to December 2018. To this end, we use a vector autoregressive approach and the impulse response function and we perform the Granger causality test between the CAC 40 index returns and six different liquidity proxies. Empirical results suggest a significant short-term relationship between the returns and the liquidity. As for causality test, the results reveal that there is unidirectional causality running from returns to liquidity.

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“…This two-way causality is supported by other studies Chen et al (2001). Czauderna et al (2015) also confirm a • For trading volume measures:…”

Section: Granger Causality Findingssupporting

confidence: 79%

Analysis of the dynamic relationship between liquidity proxies and returns on the French CAC 40 index

Assoil

Kamdem

2021

SN Bus Econ

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“…15. For a discussion of these and other liquidity measures and their performance, see Goyenko et al (2009). Czauderna et al (2015) provide a good treatment of the limitations of the Amihud illiquidity measure.…”

Section: Notesmentioning

confidence: 99%

Price formation in call auctions with insider information

Brünner

2019

SEF

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Purpose This study aims to investigate – theoretically and empirically – if call auctions incorporate asymmetric information into prices. Design/methodology/approach First, this study introduces a new model of price formation in a call auction with insider information. In this call auction model, insider trading gives rise to an asymmetric information component of transaction costs. Next, this study estimates the model using 20 stocks from Euronext Paris and investigates if the asymmetric information component is present. Findings The theoretical analysis reveals that call auctions incorporate asymmetric information into prices. The empirical analysis finds strong evidence for the asymmetric information component. Testable implications provide further support for the model. Practical implications Call auctions have recently been proposed as an alternative to continuous limit order book markets to overcome problems associated with high-frequency trading. However, it is still an open question whether call auctions efficiently aggregate asymmetric information. The findings of this study imply that call auctions facilitate price discovery and, therefore, are a viable alternative to continuous limit order book markets. Originality/value There is no generally accepted measure of trading costs for call auctions. Therefore, the measure introduced in this study is of great value to anyone who wants to quantify trading costs in call auctions, understand the determinants of trading costs in call auctions or compare trading costs and their components between continuous markets and call auctions. This study also contributes to the literature devoted to estimating the probability of information-based trading.

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“…The results presented in the paper may be burdened with the problem of endogeneity as there may exist reverse causality between stock returns and liquidity (Czauderna et al , 2015), and liquidity proxy applied may under- or overestimate the true liquidity. However, applied methods of estimation (i.e.…”

Section: Discussionmentioning

confidence: 99%

Conditional stock liquidity premium: is Warsaw stock exchange different?

Stereńczak

2021

SEF

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Purpose This paper aims to empirically indicate the factors influencing stock liquidity premium (i.e. the relationship between liquidity and stock returns) in one of the leading European emerging markets, namely, the Polish one. Design/methodology/approach Various firms’ characteristics and market states are analysed as potentially affecting liquidity premiums in the Polish stock market. Stock returns are regressed on liquidity measures and panel models are used. Liquidity premium has been estimated in various subsamples. Findings The findings vividly contradict the common sense that liquidity premium raises during the periods of stress. Liquidity premium does not increase during bear markets, as investors lengthen the investment horizon when market liquidity decreases. Liquidity premium varies with the firm’s size, book-to-market value and stock risk, but these patterns seem to vanish during a bear market. Originality/value This is one of the first empirical papers considering conditional stock liquidity premium in an emerging market. Using a unique methodological design it is presented that liquidity premium in emerging markets behaves differently than in developed markets.

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Liquidity and conditional market returns: Evidence from German exchange traded funds

Cited by 15 publications

References 19 publications

Analysis of the dynamic relationship between liquidity proxies and returns on the French CAC 40 index

Analysis of the dynamic relationship between liquidity proxies and returns on the French CAC 40 index

Price formation in call auctions with insider information

Conditional stock liquidity premium: is Warsaw stock exchange different?

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