Time Variation in Liquidity: The Role of Market-Maker Inventories and Revenues
University of Melbourne - Department of Finance; Financial Research Network (FIRN)
University of California, Berkeley - Haas School of Business
Charles M. Jones
Columbia Business School - Finance and Economics
Pamela C. Moulton
Mark S. Seasholes
Hong Kong University of Science & Technology (HKUST)
Journal of Finance, Vol. 65, No. 1, pp. 295-331, 2010
We show that market-maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity-supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market-level and specialist firm-level spreads widen when specialists have large positions or lose money. The effects are nonlinear and most prominent when inventories are big or trading results have been particularly poor. These sensitivities are smaller after specialist firm mergers, consistent with deep pockets easing financing constraints. Finally, compared to low volatility stocks, the liquidity of high volatility stocks is more sensitive to inventories and losses.
Number of Pages in PDF File: 59Accepted Paper Series
Date posted: October 26, 2011 ; Last revised: December 3, 2012
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