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A Multi-Factor Measure for Cross-Market Liquidity Commonality

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  • Wang, Jian-Xin

    (University of Technology Sydney)

Abstract

Liquidity commonality is defined as liquidity co-movements across assets or markets. In the current literature, it is measured relative to a single factor, i.e., the average liquidity across assets or markets. However, liquidity co-movements may not be fully captured by this single factor. Other factors, e.g., aggregate return and volatility, may also contribute to liquidity co-movements. Using Asian stock markets as an example, this paper shows that cross-market liquidity commonality is much higher when measured relative to a set of regional and global factors instead of the single factor. Over the sample period from January 2000 to April 2010, cross-market commonality explains around 9% of daily liquidity variations for Asian emerging markets, and around 14% of daily liquidity variations for Asian developed markets. When measured relative to the average regional liquidity, these estimates are less than 2%, similar to those in existing studies. The paper finds that regional factors affect liquidity commonality through shocks in liquidity and volatility, while global factors affect liquidity commonality through return and volatility. Cross-market liquidity commonality in Asia increased significantly during and after the recent global financial crisis.

Suggested Citation

  • Wang, Jian-Xin, 2010. "A Multi-Factor Measure for Cross-Market Liquidity Commonality," ADB Economics Working Paper Series 230, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0230
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    References listed on IDEAS

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    More about this item

    Keywords

    Asian stock markets; liquidity commonality; market factors; liquidity variations; global financial crisis;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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