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Commonality in liquidity: An empirical examination of emerging order-driven equity and derivatives market

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  • Syamala, Sudhakar Reddy
  • Reddy, V. Nagi
  • Goyal, Abhinav

Abstract

Using a sample of actively traded stocks and options from emerging order-driven market, this study examines and provides satisfactory evidence for the existence of commonality in liquidity for both spot and derivatives market. For equities, the market- and industry-wide commonality remain strong even after controlling for market returns and individual firm volatility and for options after accounting for the underlying stock market liquidity and implied volatility. Compared to the stock market, options market exhibit an increased commonality in liquidity with market capitalization. Here, information asymmetry acts as an important microstructure related source of commonality in liquidity across markets. The findings are robust across call and put options with negligible evidence of cross-sectional error correlation for all the liquidity measures.

Suggested Citation

  • Syamala, Sudhakar Reddy & Reddy, V. Nagi & Goyal, Abhinav, 2014. "Commonality in liquidity: An empirical examination of emerging order-driven equity and derivatives market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 317-334.
  • Handle: RePEc:eee:intfin:v:33:y:2014:i:c:p:317-334
    DOI: 10.1016/j.intfin.2014.09.001
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    References listed on IDEAS

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    1. repec:eee:ecofin:v:42:y:2017:i:c:p:38-52 is not listed on IDEAS
    2. Batten, Jonathan A. & Lucey, Brian M. & Peat, Maurice, 2016. "Gold and silver manipulation: What can be empirically verified?," Economic Modelling, Elsevier, vol. 56(C), pages 168-176.

    More about this item

    Keywords

    Microstructure; Commonality; Liquidity; Emerging order-driven market;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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