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Emerging Market Liquidity and Crises

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  • Eduardo Levy Yeyati
  • Sergio L. Schmukler
  • Neeltje Van Horen

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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Bibliographic Info

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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Citations

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Cited by:
  1. 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.
  2. Wang, Jianxin, 2013. "Liquidity commonality among Asian equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1209-1231.
  3. 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.
  4. 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.
  5. Liliana Cavieres & Luis Opazo, 2010. "Fixed income investments: evolution in a liquidity shortage episode," IFC Bulletins chapters, in: Bank for International Settlements (ed.), The IFC's contribution to the 57th ISI Session, Durban, August 2009, volume 33, pages 400-409 Bank for International Settlements.
  6. Jelena Minovic, 2011. "Liquidity Measuring of Financial Market in Western Balkan Region: The Case of Serbia," Book Chapters, Institute of Economic Sciences.
  7. Research Group, Development, 2008. "Lessons from World Bank Research on Financial Crises," Policy Research Working Paper Series 4779, The World Bank.
  8. Jelena Minović & Boško Živković, 2012. "Impact Of Liquidity And Size Premium On Equity Price Formation In Serbia," Economic Annals, Faculty of Economics, University of Belgrade, vol. 57(195), pages 43-78, October -.
  9. Lagoarde-Segot, Thomas, 2013. "Does stock market development always improve firm-level financing? Evidence from Tunisia," Research in International Business and Finance, Elsevier, vol. 27(1), pages 183-208.

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