Uncertainty, Market Structure, and Liquidity
Kee H. Chung
State University of New York at Buffalo - School of Management
Kansas State University - Department of Finance
December 9, 2013
Journal of Financial Economics (JFE), Forthcoming
In this study we show that market uncertainty (measured by VIX) exerts a large market-wide impact on liquidity which gives rise to co-movements in individual asset liquidity. The effect of VIX on stock liquidity is greater than the combined effects of all other common determinants of stock liquidity. We show that the uncertainty elasticity of liquidity (UEL: % change in liquidity given a 1% change in VIX) has increased dramatically around regulatory changes in the U.S. markets that increased the role of public traders in liquidity provision, reduced the minimum allowable price variation, weakened the affirmative obligation of NASDAQ dealers, and abolished the specialist system on the NYSE.
Number of Pages in PDF File: 57
Keywords: Liquidity commonality, VIX, Volatility, Market makers, Uncertainty, Bid-ask spread, Market structure
JEL Classification: G01, G02, G10, G18Accepted Paper Series
Date posted: December 6, 2013 ; Last revised: February 2, 2014
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