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Stock price synchronicity and liquidity

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  • Chan, Kalok
  • Hameed, Allaudeen
  • Kang, Wenjin

Abstract

We argue and provide evidence that stock price synchronicity affects stock liquidity. Under the relative synchronicity hypothesis, higher return co-movement (i.e., higher systematic volatility relative to total volatility) improves liquidity. Under the absolute synchronicity hypothesis, stocks with higher systematic volatility or beta are more liquid. Our results support both hypotheses. We find all three illiquidity measures (effective proportional bid-ask spread, price impact measure, and Amihud's illiquidity measure) are negatively related to stock return co-movement and systematic volatility. Our analysis also shows that larger industry-wide component in returns improves liquidity. We find that improvement in liquidity following additions to the S&P 500 Index is related to the stock's increase in return co-movement.

Suggested Citation

  • Chan, Kalok & Hameed, Allaudeen & Kang, Wenjin, 2013. "Stock price synchronicity and liquidity," Journal of Financial Markets, Elsevier, vol. 16(3), pages 414-438.
    • Handle: RePEc:eee:finmar:v:16:y:2013:i:3:p:414-438
    DOI: 10.1016/j.finmar.2012.09.007
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    More about this item

    Keywords

    Liquidity; Price synchronicity; Systematic volatility;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other

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