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An Empirical Analysis of Stock and Bond Market Liquidity
Tarun Chordia Emory University - Department of Finance Asani Sarkar Federal Reserve Bank of New York Avanidhar Subrahmanyam University of California, Los Angeles - Finance Area March 2003 FRB NY Staff Report No. 164 Abstract: We study the joint time-series of daily liquidity in government bond and stock markets over the period 1991 to 1998. Innovations in liquidity are positively and significantly correlated across stock and bond markets. Further, order imbalances in the stock market impact bond and stock liquidity, even after controlling for order imbalances in the bond market. Both results suggest the existence of a common liquidity factor in stock and bond markets. We consider monetary conditions and mutual fund flows as sources of order flow and as primitive determinants of liquidity. Monetary expansion enhances stock market liquidity during crises. U.S. government bond funds see higher inflows and equity funds see higher outflows during financial crises, and these flows are associated with decreased liquidity in stock and bond markets. Our results establish a link between "macro" liquidity, or money flows, and "micro" or transactions liquidity.
JEL Classifications: G10, G14, G23, E52 Working Paper SeriesDate posted: November 01, 2001 ; Last revised: March 27, 2006Suggested CitationContact Information
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