Common determinants of bond and stock market liquidity: the impact of financial crises, monetary policy, and mutual fund flows
AbstractWe study common determinants of daily bid-ask spreads and trading volume for the bond and stock markets over the 1991-98 period. We find that spread changes in one market are affected by lagged spread and volume changes in both markets. Further, spread and volume changes are predictable to a considerable degree using lagged market returns, lagged interest rates, lagged spreads, and lagged volume. During periods of financial crisis, stock and bond spreads and volume are more volatile and become more highly correlated; moreover, at these times, money supply positively affects financial market liquidity, albeit with a lag of two weeks. During normal times, increases in mutual fund flows enhance stock market liquidity and trading volume, but during financial crises, U.S. government bond funds see higher inflows, resulting in increased bond market liquidity. Overall, this study deepens our understanding of the dynamics of liquidity in financial markets and suggests how asset allocation strategies might be designed to reduce trading costs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 141.
Date of creation: 2001
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-03-14 (All new papers)
- NEP-FMK-2002-03-14 (Financial Markets)
- NEP-IFN-2002-03-14 (International Finance)
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.:
- Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
- Hans R. Stoll, .
"The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks,"
Rodney L. White Center for Financial Research Working Papers
13-77, Wharton School Rodney L. White Center for Financial Research.
- Stoll, Hans R, 1978. "The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks," Journal of Finance, American Finance Association, vol. 33(4), pages 1153-72, September.
- Harris, Lawrence E & Gurel, Eitan, 1986. " Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-29, September.
- Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
- Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
- Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April.
- Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
- Michael J. Fleming, 2001. "Financial market implications of the federal debt paydown," Staff Reports 120, Federal Reserve Bank of New York.
- Michael J. Fleming, 2001.
"Measuring treasury market liquidity,"
133, Federal Reserve Bank of New York.
- Michael J. Fleming & Eli M. Remolona, 1997.
"What moves the bond market?,"
9706, Federal Reserve Bank of New York.
- Edelen, Roger M., 1999. "Investor flows and the assessed performance of open-end mutual funds," Journal of Financial Economics, Elsevier, vol. 53(3), pages 439-466, September.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- Michael J. Flemming, 2000. "Financial Market Implications of the Federal Debt Paydown," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 221-252.
- Huberman, G. & Halka, D., 1999.
99-9, Columbia - Graduate School of Business.
- Jacoby, Gady & Fowler, David J. & Gottesman, Aron A., 2000. "The capital asset pricing model and the liquidity effect: A theoretical approach," Journal of Financial Markets, Elsevier, vol. 3(1), pages 69-81, February.
- Yihong Xia, 2001. "Learning about Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," Journal of Finance, American Finance Association, vol. 56(1), pages 205-246, 02.
- Spiegel, Matthew & Subrahmanyam, Avanidhar, 1995. " On Intraday Risk Premia," Journal of Finance, American Finance Association, vol. 50(1), pages 319-39, March.
- Hiemstra, Craig & Jones, Jonathan D, 1994. " Testing for Linear and Nonlinear Granger Causality in the Stock Price-Volume Relation," Journal of Finance, American Finance Association, vol. 49(5), pages 1639-64, December.
- Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
- Ho, Thomas S Y & Stoll, Hans R, 1983. " The Dynamics of Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 38(4), pages 1053-74, September.
- Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02.
- Garcia, Gillian, 1989. "The Lender of Last Resort in the Wake of the Crash," American Economic Review, American Economic Association, vol. 79(2), pages 151-55, May.
- Hans R. Stoll, 2000. "Presidential Address: Friction," Journal of Finance, American Finance Association, vol. 55(4), pages 1479-1514, 08.
- Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04.
- Flavia Barna & Dan-Constantin Dănuleţiu & Petru-Ovidiu Mura, 2009. "World Market of Investment Funds - Developments and Trends," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 9(3), pages 41-52.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber).
If references are entirely missing, you can add them using this form.