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Some hypothesis on commonality in liquidity: New evidence from the Chinese stock market

  • Paresh Kumar Narayan


  • Xinwei Zheng


  • Zhichao Zhang

In this paper, we examine four specific hypotheses relating to commonality in liquidity on the Chinese stock markets. These hypotheses are: (a) that market-wide liquidity determines liquidity of individual stocks; (b) that liquidity varies with firm size; (c) that sectoral-based liquidity affects individual stock liquidities differently; and (d) that commonality in liquidity has an asymmetric effect. Based on a two-year dataset on the Shanghai and Shenzhen stock exchanges comprising of over 34 and 48 million transactions respectively, we find strong support for commonality in liquidity and a greater influence of industry-wide liquidity in explaining liquidity of individual stocks. Moreover, our results suggest that of the three main sectors – financial, industrial, and resources – industrial sector‟s liquidity is most important in explaining individual stock liquidities. Finally, we do not find any evidence of size effects, and document an asymmetric effect of market-wide liquidity on liquidity of individual stocks.

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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Financial Econometics Series with number 2011_11.

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Length: 48
Date of creation: 29 Aug 2011
Date of revision:
Handle: RePEc:dkn:ecomet:fe_2011_11
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  1. Roberto Pascual & Alvaro Escribano & Mikel Tapia, 2004. "On the bi-dimensionality of liquidity," The European Journal of Finance, Taylor & Francis Journals, vol. 10(6), pages 542-566.
  2. Korajczyk, Robert A. & Sadka, Ronnie, 2008. "Pricing the commonality across alternative measures of liquidity," Journal of Financial Economics, Elsevier, vol. 87(1), pages 45-72, January.
  3. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  4. Pukthuanthong-Le, Kuntara & Visaltanachoti, Nuttawat, 2009. "Commonality in liquidity: Evidence from the Stock Exchange of Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 80-99, January.
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