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Liquidity Dynamics Across Small and Large Firms

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  • Chordia, Tarun
  • Shivakumar, L
  • Subrahmanyam, Avanidhar

Abstract

In this paper, we analyze cross-sectional heterogeneity in the time-series variation of liquidity in equity markets. Our analysis uses a broad time-series and cross-section of liquidity data. We find that average daily changes in liquidity exhibit significant heterogeneity in the cross-section; the liquidity of small firms varies more on a daily basis than that of large firms. A steady increase in aggregate market liquidity over the past decade is more strongly manifest in large firms than in small firms. Absolute stock returns are an important determinant of liquidity. We investigate cross-sectional differences in the resilience of a firm’s liquidity to information shocks. We use the sensitivity of stock liquidity to absolute stock returns as an inverse measure of this resilience, and find that the measure exhibits considerable cross-sectional variation. Firm size, return volatility, institutional holdings, and volume are all significant cross-sectional determinants of this measure.

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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt2zs4b4j4.

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Date of creation: 13 Aug 2000
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Handle: RePEc:cdl:anderf:qt2zs4b4j4

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Cited by:
  1. Chai, Daniel & Faff, Robert & Gharghori, Philip, 2010. "New evidence on the relation between stock liquidity and measures of trading activity," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 181-192, June.
  2. Masahiro Watanabe, 2003. "A Model of Stochastic Liquidity," Yale School of Management Working Papers ysm385, Yale School of Management.
  3. Matthieu Wyart & Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters & Michele Vettorazzo, 2006. "Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets," Papers physics/0603084, arXiv.org, revised Mar 2007.
  4. Lee, Kuan-Hui, 2005. "The World Price of Liquidity Risk," Working Paper Series 2006-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  5. Pasquariello, Paolo, 2007. "Informative trading or just costly noise? An analysis of Central Bank interventions," Journal of Financial Markets, Elsevier, vol. 10(2), pages 107-143, May.
  6. Pasquariello, Paolo, 2014. "Prospect Theory and market quality," Journal of Economic Theory, Elsevier, vol. 149(C), pages 276-310.

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