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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Volume (Year): 6 (2008) Issue (Month): 2-3 (04-05) Pages: 668-682 Download reference. The following formats are available: HTML
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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 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.:
Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992.
"Stock Prices and Volume,"
Review of Financial Studies,
Oxford University Press for Society for Financial Studies, vol. 5(2), pages 199-242.
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