The Information Environment, Volatility Structure, and Liquidity

53 Pages Posted: 16 Jun 2015 Last revised: 21 Feb 2019

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

Balazs Cserna

University of Frankfurt

Alon Kalay

Columbia Business School - Accounting, Business Law & Taxation

Ariel Levy

Date Written: February 18, 2019

Abstract

A central theme in existing literature is that increased disclosure and transparency reduce the level of information asymmetry between market makers and informed traders and thus increase liquidity. In contrast, in this study we propose and empirically investigate a new and unexplored channel through which the information environment can affect liquidity. We predict that for a given level of information asymmetry, or even absent information asymmetry, reduced disclosure and less transparent information environments make changes in the firm's stock price more discontinuous (jumpy) and hence change the structure of volatility. We further predict that market makers reduce liquidity as a result, because it is significantly more difficult for them to hedge discontinuous price changes (jump volatility) to their inventory than continuous price changes (diffusive volatility). Using both associations and causal tests we find a negative relation between the transparency of the information environment and jump volatility. We then show that jump volatility is negatively associated with liquidity, even after controlling for information asymmetry, while diffusion has a positive association. Finally, we present causal evidence that the information environment affects liquidity through jump volatility. Our findings have implications for our understanding of liquidity, corporate finance decisions, and policy-makers.

Keywords: Disclosure, Information enviornment, Liquidity, Liquidity risk, Volatility, Jump

Suggested Citation

Amiram, Dan and Cserna, Balazs and Kalay, Alon and Levy, Ariel, The Information Environment, Volatility Structure, and Liquidity (February 18, 2019). Columbia Business School Research Paper No. 15-62. Available at SSRN: https://ssrn.com/abstract=2618424 or http://dx.doi.org/10.2139/ssrn.2618424

Dan Amiram (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Balazs Cserna

University of Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Alon Kalay

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

No contact information is available for Ariel Levy

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