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The divergence of liquidity commonality in the cross-section of stocks

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  • Kamara, Avraham
  • Lou, Xiaoxia
  • Sadka, Ronnie

Abstract

This paper demonstrates that the cross-sectional variation of liquidity commonality has increased over the period 1963-2005. The divergence of systematic liquidity can be explained by patterns in institutional ownership over the sample period. We document that our findings are associated with similar patterns in systematic risk. Our analysis also indicates that the ability to diversify systematic risk and aggregate liquidity shocks by holding large-cap stocks has declined. The evidence suggests that the fragility of the US equity market to unanticipated events has increased over the past few decades.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 89 (2008)
Issue (Month): 3 (September)
Pages: 444-466

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Handle: RePEc:eee:jfinec:v:89:y:2008:i:3:p:444-466

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Liquidity commonality Asset pricing Institutional ownership Basket and index trading Systematic vs. idiosyncratic risk Diversification;

References

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Citations

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Cited by:
  1. René M. Stulz & Dimitrios Vagias & Mathijs A. van Dijk, 2013. "Do Firms Issue more equity when markets are more liquid?," NBER Working Papers 19229, National Bureau of Economic Research, Inc.
  2. Lee, Kuan-Hui, 2011. "The world price of liquidity risk," Journal of Financial Economics, Elsevier, vol. 99(1), pages 136-161, January.
  3. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2013. "Liquidity commonality in commodities," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 11-20.
  4. Lischewski, Judith & Voronkova, Svitlana, 2012. "Size, value and liquidity. Do They Really Matter on an Emerging Stock Market?," Emerging Markets Review, Elsevier, vol. 13(1), pages 8-25.
  5. Wang, Jianxin, 2013. "Liquidity commonality among Asian equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1209-1231.
  6. Lynch, Andrew & Nikolic, Biljana & Yan, Xuemin (Sterling) & Yu, Han, 2014. "Aggregate short selling, commonality, and stock market returns," Journal of Financial Markets, Elsevier, vol. 17(C), pages 199-229.
  7. Corwin, Shane A. & Lipson, Marc L., 2011. "Order characteristics and the sources of commonality in prices and liquidity," Journal of Financial Markets, Elsevier, vol. 14(1), pages 47-81, February.
  8. Ana González & Gonzalo Rubio, 2011. "Portfolio choice and the effects of liquidity," SERIEs, Spanish Economic Association, vol. 2(1), pages 53-74, March.
  9. Chuang, Wen-I & Lee, Hsiu-Chuan, 2010. "The Impact of Short-Sales Constraints on Liquidity and the Liquidity-Return Relations," Pacific-Basin Finance Journal, Elsevier, vol. 18(5), pages 521-535, November.
  10. Richard G. Anderson & Jane M. Binner & Björn Hagströmer & Birger Nilsson, 2013. "Does commonality in illiquidity matter to investors?," Working Papers 2013-020, Federal Reserve Bank of St. Louis.
  11. Mayordomo, Sergio & Rodriguez-Moreno, Maria & Peña, Juan Ignacio, 2014. "Liquidity commonalities in the corporate CDS market around the 2007–2012 financial crisis," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 171-192.
  12. Pasquariello, Paolo, 2014. "Prospect Theory and market quality," Journal of Economic Theory, Elsevier, vol. 149(C), pages 276-310.
  13. Pilar Abad & M. Dolores Robles & Gare Cuervo, 2013. "Changes in Corporate Debt Ratings and Stock Liquidity: Evidence from the Spanish Market," Documentos de Trabajo del ICAE 2013-11, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  14. Karolyi, G. Andrew & Lee, Kuan-Hui & van Dijk, Mathijs A., 2012. "Understanding commonality in liquidity around the world," Journal of Financial Economics, Elsevier, vol. 105(1), pages 82-112.
  15. Kang, Namho & Kondor, Péter & Sadka, Ronnie, 2011. "Idiosyncratic Return Volatility in the Cross-Section of Stocks," CEPR Discussion Papers 8307, C.E.P.R. Discussion Papers.
  16. Rösch, Christoph G. & Kaserer, Christoph, 2013. "Market liquidity in the financial crisis: The role of liquidity commonality and flight-to-quality," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2284-2302.
  17. Márquez, Elena & Nieto, Belén & Rubio, Gonzalo, 2014. "Stock returns with consumption and illiquidity risks," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 57-74.

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