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Emerging Market Liquidity and Crises

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Author Info
Eduardo Levy Yeyati
Sergio L. Schmukler
Neeltje Van Horen

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Abstract

Whereas conventional wisdom argues that markets shut down during crises, with sellers struggling to find buyers, we find that markets continue to operate during financial turmoil, even in narrow and volatile emerging economies. Simple event studies indicate that both trading volume and trading costs increase in crisis times. Prices change more with each dollar transacted (pushing the Amihud illiquidity measure up) and bid-ask spreads widen. More generally, econometric estimates show that large price downturns, typical of crises, are associated with higher trading activity and increased trading costs, with trading activity declining only later as crises progress. Thus, although trading activity tends to be negatively related to trading costs during tranquil times (and across securities), this relation appears to break down during crises. These results are consistent with the analytical literature on portfolio rebalancing by heterogeneous agents in times of crises. (JEL: F30, G10, G12, G14) (c) 2008 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 6 (2008)
Issue (Month): 2-3 (04-05)
Pages: 668-682
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Handle: RePEc:tpr:jeurec:v:6:y:2008:i:2-3:p:668-682

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yeyati, Eduardo Levy & Schmukler, Sergio L. & Van Horen, Neeltje, 2008. "Crises, capital controls, and financial integration," Policy Research Working Paper Series 4770, The World Bank. [Downloadable!]
    Other versions:
  2. Wai-Ming Fong & Giorgio Valente & Joseph K.W. Fung, 2008. "FX Arbitrage and Market Liquidity: Statistical Significance and Economic Value," Working Papers 082008, Hong Kong Institute for Monetary Research. [Downloadable!]
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