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Illiquid Trades on Insurance Companies in Financial Crisis

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  • Han-ching Huang
  • Yong-chern Su
  • Szu-Chieh Yang

Abstract

The bankrupt of Lehman Brothers in 2008 triggered a series of panic selling on stocks, especially the stock of insurance companies, which makes the illiquidity of stock markets. Therefore, in this study we examine the relation between insurance companies’ stock liquidity and return, and market makers’ behavior when market is illiquid. We find that before financial crisis market makers’ inventory level of stock is not sufficient, hence, they have to adjust quote price when they confront order imbalances. Nevertheless, the impacts of order imbalances become insignificant after crisis. Market makers do not adjust quote price as much as to fully reflect the information because they need time to assert that the imbalances contain information before financial crisis. Nevertheless, they fully adjust quote price simultaneously when they confront large order imbalance after financial crisis, because they consider that large order imbalances are definitely informed trading when market is illiquid. Connection between order imbalances and price volatility is low. It means that market makers have great ability to stable price volatility when facing the unexpected shocks. Market of insurance companies has less liquidity after financial crisis. While the market is illiquid after crisis, investors do not require significant higher liquidity premium. JEL classification numbers: G22Keywords: Insurance companies, stock liquidity and return.

Suggested Citation

  • Han-ching Huang & Yong-chern Su & Szu-Chieh Yang, 2019. "Illiquid Trades on Insurance Companies in Financial Crisis," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 9(5), pages 1-5.
    • Handle: RePEc:spt:admaec:v:9:y:2019:i:5:f:9_5_5
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    References listed on IDEAS

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