Systematic Liquidity and the Funding Liquidity Hypothesis

57 Pages Posted: 4 Apr 2013 Last revised: 10 Oct 2014

See all articles by Xiaolin Qian

Xiaolin Qian

Eastspring Investment

Lewis Tam

Faculty of Business Administration, University of Macau

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: July 31, 2013

Abstract

In order to reconcile weak evidence of supply-side determinants of commonality in liquidity in previous studies, we examine commonality in liquidity in China over the period 1995-2012. Consistent with supply-side explanations, we find that market declines and market volatility increase liquidity commonality. To identify the direct relationship between the supply-side determinants and commonality in liquidity, we provide two specific tests and show that an increase in market participants has a negative effect on liquidity commonality, while the share-split-structure reform in 2005-2007 that results in a large increase in shares supply has a positive impact on liquidity commonality. Finally, we find that commonality in liquidity also has a real impact on the economy.

Keywords: Commonality, Liquidity, Chinese Stock Market

JEL Classification: G14, G15, G31

Suggested Citation

Qian, Xiaolin and Tam, Lewis and Zhang, Bohui, Systematic Liquidity and the Funding Liquidity Hypothesis (July 31, 2013). Journal of Banking and Finance, Forthcoming; Systemic Risk: Liquidity Risk, Governance and Financial Stability. Available at SSRN: https://ssrn.com/abstract=2242847 or http://dx.doi.org/10.2139/ssrn.2242847

Xiaolin Qian (Contact Author)

Eastspring Investment ( email )

10 Marina Boulevard, #32-01
Marina Bay Financial Centre Tower 2
Singapore, 018983
Singapore
018983 (Fax)

Lewis Tam

Faculty of Business Administration, University of Macau ( email )

Room E22-4055, University of Macau
Avenida da Universidade
Taipa
Macau

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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