Systematic Liquidity and the Funding Liquidity Hypothesis
57 Pages Posted: 4 Apr 2013 Last revised: 10 Oct 2014
Date Written: July 31, 2013
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: Suggested Citation