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Commonality under market stress: Evidence from an order-driven market

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  • Brockman, Paul
  • Chung, Dennis Y.

Abstract

Recent evidence shows that commonality in liquidity decreases at the aggregate level in a quote-driven specialist market during periods of market stress. Specialists and dealers in quote-driven markets have an affirmative obligation to provide liquidity, even if prices are falling precipitously. The purpose of our study is to investigate commonality in liquidity in a market structure without any affirmative obligation to provide liquidity (i.e., in an order-driven market). We collect intra-day data from one of the world's largest and most active order-driven markets, the Stock Exchange of Hong Kong (SEHK), and find that commonality increases during periods of market stress. We also show that larger firms tend to be more susceptible to changes in commonality than smaller firms. We hypothesize that order-driven markets behave differently from quote-driven markets under stress because order-driven market makers have a free exit option.

Suggested Citation

  • Brockman, Paul & Chung, Dennis Y., 2008. "Commonality under market stress: Evidence from an order-driven market," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 179-196.
  • Handle: RePEc:eee:reveco:v:17:y:2008:i:2:p:179-196
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    References listed on IDEAS

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    1. Hee-Joon Ahn, 2001. "Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong," Journal of Finance, American Finance Association, vol. 56(2), pages 767-788, April.
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    5. Brockman, Paul & Chung, Dennis Y., 1998. "Inter- and intra-day liquidity patterns on the Stock Exchange of Hong Kong," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 277-298, December.
    6. Ahn, Hee-Joon & Cheung, Yan-Leung, 1999. "The intraday patterns of the spread and depth in a market without market makers: The Stock Exchange of Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 7(5), pages 539-556, December.
    7. Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    8. Brockman, Paul & Chung, Dennis Y, 2000. "Informed and Uninformed Trading in an Electronic, Order-Driven Environment," The Financial Review, Eastern Finance Association, vol. 35(2), pages 125-146, May.
    9. Chan, Yue-Cheong, 2000. "The price impact of trading on the stock exchange of Hong Kong," Journal of Financial Markets, Elsevier, vol. 3(1), pages 1-16, February.
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    14. Paul Brockman & Dennis Y. Chung, 2002. "Commonality in Liquidity: Evidence from an Order-Driven Market Structure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 521-539.
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    1. repec:ehu:cuader:15779 is not listed on IDEAS
    2. Mayordomo, Sergio & Rodriguez-Moreno, Maria & Peña, Juan Ignacio, 2014. "Liquidity commonalities in the corporate CDS market around the 2007–2012 financial crisis," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 171-192.
    3. Modena, Matteo & Linciano, Nadia & Gentile, Monica & Fancello, Francesco, 2014. "The liquidity of dual-listed corporate bonds: empirical evidence from Italian markets," MPRA Paper 62479, University Library of Munich, Germany, revised 23 Feb 2015.
    4. Cotter, John & Dowd, Kevin, 2010. "Intra-day seasonality in foreign exchange market transactions," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 287-294, April.
    5. Márquez, Elena & Nieto, Belén & Rubio, Gonzalo, 2014. "Stock returns with consumption and illiquidity risks," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 57-74.
    6. repec:eee:finsta:v:33:y:2017:i:c:p:297-310 is not listed on IDEAS

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