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Commonality in liquidity in emerging markets: Another supply-side explanation

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  • Bai, Min
  • Qin, Yafeng

Abstract

Emerging markets share many distinct features that separate them from more developed markets, including low liquidity and high commonality in liquidity. This study on 18 emerging markets finds that individual stock liquidity is more affected by systematic volatility than by idiosyncratic volatility, suggesting that higher commonality in liquidity in emerging markets could be caused by higher co-variation in stock volatility and co-variation in inventory risk. Consistent with this conjecture, commonality in liquidity is found to be positively related to co-movement in volatility, and negatively related to the level of development of the financial markets. This study also documents that liquidity co-movement across emerging markets has a strong geographic component and is related to a correlation in market-wide volatility. The results do not support the presence of a global liquidity factor, and suggest that liquidity risk can be diversified by constructing global portfolios.

Suggested Citation

  • Bai, Min & Qin, Yafeng, 2015. "Commonality in liquidity in emerging markets: Another supply-side explanation," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 90-106.
    • Handle: RePEc:eee:reveco:v:39:y:2015:i:c:p:90-106
    DOI: 10.1016/j.iref.2015.06.005
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    8. Du, Ruijin & Wang, Ya & Dong, Gaogao & Tian, Lixin & Liu, Yixiao & Wang, Minggang & Fang, Guochang, 2017. "A complex network perspective on interrelations and evolution features of international oil trade, 2002–2013," Applied Energy, Elsevier, vol. 196(C), pages 142-151.
    9. Joanna Olbryś & Elżbieta Majewska, 2020. "Assessing Commonality in Liquidity with Principal Component Analysis: The Case of the Warsaw Stock Exchange," JRFM, MDPI, vol. 13(12), pages 1-13, December.
    10. Ruijin Du & Gaogao Dong & Lixin Tian & Minggang Wang & Guochang Fang & Shuai Shao, 2016. "Spatiotemporal Dynamics and Fitness Analysis of Global Oil Market: Based on Complex Network," PLOS ONE, Public Library of Science, vol. 11(10), pages 1-17, October.

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    More about this item

    Keywords

    Commonality; Liquidity; Emerging markets;
    All these keywords.

    JEL classification:

    • 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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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