Download this Paper Open PDF in Browser

Uncertainty, Market Structure, and Liquidity

58 Pages Posted: 6 Dec 2013 Last revised: 16 May 2014

Kee H. Chung

State University of New York at Buffalo - School of Management

Chairat Chuwonganant

Kansas State University - Department of Finance

Date Written: December 9, 2013

Abstract

In this study we show that market uncertainty [measured by the Chicago Board Options Exchange Market Volatility Index (VIX)] exerts a large market-wide impact on liquidity, which gives rise to co-movements in individual asset liquidity. The effect of VIX on stock liquidity is greater than the combined effects of all other common determinants of stock liquidity. We show that the uncertainty elasticity of liquidity (UEL: percent change in liquidity given a 1% change in VIX) has increased around regulatory changes in the US markets that increased the role of public traders in liquidity provision, reduced the minimum allowable price variation, weakened the affirmative obligation of NASDAQ dealers, and abolished the specialist system on the NYSE.

Keywords: Liquidity commonality, VIX, Volatility, Market makers, Uncertainty, Bid-ask spread, Market structure

JEL Classification: G01; G14; G18

Suggested Citation

Chung, Kee H. and Chuwonganant, Chairat, Uncertainty, Market Structure, and Liquidity (December 9, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2363755

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Chairat Chuwonganant

Kansas State University - Department of Finance ( email )

Manhattan, KS 66506
United States

Paper statistics

Downloads
381
Rank
64,141
Abstract Views
2,004