Stock Price Synchronicity and Liquidity

39 Pages Posted: 13 Mar 2008 Last revised: 8 Feb 2009

See all articles by Wenjin Kang

Wenjin Kang

School of Finance, Shanghai University of Finance and Economics

Kalok Chan

CUHK Business School

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Date Written: September 2008

Abstract

In this paper, we conjecture that stock price synchronicity can affect the adverse information risk faced by market makers and therefore the liquidity of the stock. We provide empirical evidence that is consistent with our conjecture. We find that stocks which co-move more with the market index have higher liquidity, computed based on effective spread, price impact or Amihud illiquidity measures. The results are obtained after controlling for cross-sectional differences in firm size, price levels, total and idiosyncratic volatilities, and are robust to both S&P and non S&P index stocks. Besides market co-movement, industry wide component in returns also reduces the adverse selection risk and improves the liquidity. We also find results related to the indexing effect. Following the addition to the S&P 500, a firm that experiences an increase in co-movement with the market is more likely to be accompanied by an improvement in liquidity. We also provide evidence that the lower bid-ask spread of ETFs is due to their relatively large stock price synchronicity.

Keywords: Price Synchronicity, Liquidity

JEL Classification: G19

Suggested Citation

Kang, Wenjin and Chan, Kalok and Hameed, Allaudeen, Stock Price Synchronicity and Liquidity (September 2008). Available at SSRN: https://ssrn.com/abstract=1103134 or http://dx.doi.org/10.2139/ssrn.1103134

Wenjin Kang (Contact Author)

School of Finance, Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu.sg/faculty-details/?profId=1

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
61
Abstract Views
548
rank
37,993
PlumX Metrics