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Emerging market liquidity and crises

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

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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, while 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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4445.

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Date of creation: 01 Dec 2007
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Handle: RePEc:wbk:wbrwps:4445

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Keywords: Debt Markets; Markets and Market Access; Emerging Markets; Economic Theory&Research;

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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.:
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  4. Javier Alvarez & Manuel Arellano, 2003. "The Time Series and Cross-Section Asymptotics of Dynamic Panel Data Estimators," Econometrica, Econometric Society, vol. 71(4), pages 1121-1159, 07. [Downloadable!] (restricted)
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  5. Hua He & Jiang Wang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," NBER Working Papers 5010, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Lesmond, David A., 2005. "Liquidity of emerging markets," Journal of Financial Economics, Elsevier, vol. 77(2), pages 411-452, August. [Downloadable!] (restricted)
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  8. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October. [Downloadable!] (restricted)
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  12. He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(4), pages 919-72. [Downloadable!] (restricted)
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  16. 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. [Downloadable!] (restricted)
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  19. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July. [Downloadable!] (restricted)
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Full references

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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