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Uncertainty, market structure, and liquidity

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  • Chung, Kee H.
  • Chuwonganant, Chairat

Abstract

In this study we show that market uncertainty [measured by the Chicago Board Options Exchange Market Volatility Index (VIX)] exerts a large market-wide impact on liquidity, which gives rise to co-movements in individual asset liquidity. The effect of VIX on stock liquidity is greater than the combined effects of all other common determinants of stock liquidity. We show that the uncertainty elasticity of liquidity (UEL: percent change in liquidity given a 1% change in VIX) has increased around regulatory changes in the US markets that increased the role of public traders in liquidity provision, reduced the minimum allowable price variation, weakened the affirmative obligation of NASDAQ dealers, and abolished the specialist system on the NYSE.

Suggested Citation

  • Chung, Kee H. & Chuwonganant, Chairat, 2014. "Uncertainty, market structure, and liquidity," Journal of Financial Economics, Elsevier, vol. 113(3), pages 476-499.
  • Handle: RePEc:eee:jfinec:v:113:y:2014:i:3:p:476-499
    DOI: 10.1016/j.jfineco.2014.05.008
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    More about this item

    Keywords

    Liquidity commonality; VIX; Volatility; Market makers; Uncertainty; Bid-ask spread; Market structure;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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