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Liquidity skewness in the London Stock Exchange

Author

Listed:
  • Hsieh, Tsung-Han
  • Li, Youwei
  • McKillop, Donal G.
  • Wu, Yuliang

Abstract

We study liquidity on the London Stock Exchange. We find that the average bid-ask spread declines, but that the skewness of the spread increases. These results are robust to firm size, trading volume and price level. Our findings hold when the bid-ask spread is estimated utilising high frequency data. We find that the bid-ask spread prior to earnings announcements dates is significantly higher than that of post earnings announcements, suggesting that asymmetric information has driven the increase in liquidity skewness. We also find that the effect of earnings announcements is more pronounced in the 2007 global financial crisis, consistent with the notion that extreme market downturns amplify asymmetric information. Our overall evidence also implies that increased competition and transparent trading environments limit market makers' abilities to cross-subsidize bid-ask spreads between periods of high and low levels of asymmetric information.

Suggested Citation

  • Hsieh, Tsung-Han & Li, Youwei & McKillop, Donal G. & Wu, Yuliang, 2018. "Liquidity skewness in the London Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 12-18.
    • Handle: RePEc:eee:finana:v:56:y:2018:i:c:p:12-18
    DOI: 10.1016/j.irfa.2017.12.006
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    References listed on IDEAS

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    Cited by:

    1. Suraj Kumar & Krishna Prasanna, 2019. "Global Financial Crisis: Dynamics of Liquidity Risk in Emerging Asia," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(3), pages 339-362, December.
    2. Liew, Ping-Xin & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Does proprietary day trading provide liquidity at a cost to investors?," International Review of Financial Analysis, Elsevier, vol. 68(C).
    3. Lin, Zhongguo & Hamill, Philip A. & Li, Youwei & Sun, Zhuowei & Waterworth, James, 2020. "How did order-flow impact bond prices during the European Sovereign Debt Crisis?," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 13-24.
    4. Yan, Wei & Hamill, Philip & Li, Youwei & Vigne, Samuel A. & Waterworth, James, 2018. "An analysis of liquidity skewness for European sovereign bond markets," Finance Research Letters, Elsevier, vol. 26(C), pages 274-280.

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    More about this item

    Keywords

    Asymmetric information; Bid-ask spread; Liquidity; London Stock Exchange; Skewness;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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