Stock Price Synchronicity and Liquidity

38 Pages Posted: 18 Mar 2008 Last revised: 1 Jan 2013

See all articles by Kalok Chan

Kalok Chan

CUHK Business School

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Wenjin Kang

School of Finance, Shanghai University of Finance and Economics

Date Written: June 2012

Abstract

We provide a simple theoretical analysis based on Kyle's (1985) framework, and demonstrate how stock price synchronicity can affect the adverse information risk that market makers face and therefore the liquidity of the stock. Our empirical evidence is consistent with our theoretical 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 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.

Keywords: Liquidity, Price Synchronicity, adverse information risk

JEL Classification: L19

Suggested Citation

Chan, Kalok and Hameed, Allaudeen and Kang, Wenjin, Stock Price Synchronicity and Liquidity (June 2012). Available at SSRN: https://ssrn.com/abstract=1106572 or http://dx.doi.org/10.2139/ssrn.1106572

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Allaudeen Hameed (Contact Author)

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

Wenjin Kang

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

777 Guoding Road
Shanghai, Shanghai 200433
China

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