Abstract

http://ssrn.com/abstract=2363755
 


 



Uncertainty, Market Structure, and Liquidity


Kee H. Chung


State University of New York at Buffalo - School of Management

Chairat Chuwonganant


Kansas State University - Department of Finance

December 9, 2013

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
In this study we show that market uncertainty [measured by the Chicago Board Options Exchange Market Volatility Index (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: percent change in liquidity given a 1% change in VIX) has increased around regulatory changes in the US 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: 58

Keywords: Liquidity commonality, VIX, Volatility, Market makers, Uncertainty, Bid-ask spread, Market structure

JEL Classification: G01; G14; G18

Accepted Paper Series


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Date posted: December 6, 2013 ; Last revised: May 16, 2014

Suggested Citation

Chung, Kee H. and Chuwonganant, Chairat, Uncertainty, Market Structure, and Liquidity (December 9, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=2363755

Contact Information

Kee H. Chung (Contact Author)
State University of New York at Buffalo - School of Management ( email )
Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)
HOME PAGE: http://mgt.buffalo.edu/home/faculty/academic/finance/faculty/keechung
Chairat Chuwonganant
Kansas State University - Department of Finance ( email )
Manhattan, KS 66506
United States
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