Emerging Market Liquidity and Crises
11 Pages Posted: 4 Oct 2007 Last revised: 22 Jun 2013
Date Written: September 10, 2007
Whereas conventional wisdom argues that markets shut down during crises, with sellers struggling to find buyers, we find that markets continue to operate during financial turmoil even in narrow and volatile emerging economies. Specifically, volume traded increases when crises erupt, decreasing only later as crises progress. This higher trading activity is accompanied by an increase in the cost of making transactions. Prices react more strongly to each dollar transacted (pushing the Amihud illiquidity measure up) and bid-ask spreads widen. That is, while trading activity moves inversely to trading costs during tranquil times (and across securities), both increase during crises.
Keywords: liquidity crisis, stock markets, trading activity, trading volume, trading cost,
JEL Classification: F30, G10, G12, G14
Suggested Citation: Suggested Citation