Liquidity Dry-ups in equity markets

Kim, Donghyun; Li, Chengcheng; Wang, Xiaoqiong

doi:10.1016/j.irfa.2023.102536

Cited by 2 publications

(2 citation statements)

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“…Liquidity, and liquidity commonality, 1 is particularly susceptible to the elevated volatility levels that accompany economic and financial market downturns (Chordia et al, 2001;Jones, 2001;Moshirian et al, 2017), which Naes et al (2011) suggest is a result of a 'flight to quality'. Relatedly, Kim et al (2023) explain that mutual funds tend to sell more liquid stocks when experiencing fund outflows, which are more aggressive during crisis periods, and this leads to liquidity disappearing for stocks that are usually highly liquid.…”

Section: Introductionmentioning

confidence: 99%

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Stock market liquidity during crisis periods: Australian evidence

Smales

2023

Accounting & Finance

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Liquidity is an important characteristic of financial markets, affecting portfolio decisions and priced risk. During periods of market turmoil, such as occurs during financial crisis, investors have an elevated need for cash and so understanding how liquidity differs during those periods is important. We examine how stock market liquidity was impacted by two crises with distinct origins, the global financial crisis (GFC) and the COVID‐pandemic. Our sample includes the S&P/ASX200 constituents for the period January 2005–December 2020. We find that the Australian stock market is less liquid during both crisis periods; spreads are wider, depth is lower, and price impact is larger (stock prices move a lot in response to small amounts of volume). Although the magnitude of the liquidity change is greater at the onset of COVID, the duration of the impact is longer during the GFC, resulting in a larger average effect. While trading volume declines during the GFC, it increases during COVID. Our results are robust to alternate liquidity proxies, methodologies and crisis period identification, and generally applicable across stock sectors.

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Section: Introductionmentioning

confidence: 99%

“…Relatedly, Kim et al. (2023) explain that mutual funds tend to sell more liquid stocks when experiencing fund outflows, which are more aggressive during crisis periods, and this leads to liquidity disappearing for stocks that are usually highly liquid.…”

Section: Introductionmentioning

confidence: 99%