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Uncovering the time-varying relationship between commonality in liquidity and volatility

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This study examines the dynamic linkages between commonality in liquidity in international stock markets and market volatility. Using a recently proposed liquidity measure as input in a variance decomposition exercise, we show that innovations to liquidity in most markets are induced predominately by inter-market innovations. We also find that commonality in liquidity peaks immediately after large market downturns, coinciding with periods of crisis. The results from a dynamic Granger causality test indicate that the relationship between commonality in liquidity and market volatility is bi-directional and time-varying. We show that while volatility Granger-causes commonality in liquidity throughout the entire sample period, market volatility is enhanced by commonality in liquidity only in sub-periods. Our results are helpful for practitioners and policy makers.

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International Review of Financial Analysis, 2020, vol. 69, num. 101466, p. 1-9

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Articles publicats en revistes  (Econometria, Estadística i Economia Aplicada)

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Uncovering the time-varying relationship between commonality in liquidity and volatility