Commonality in Liquidity: An Empirical Examination of Emerging Order–Driven Equity and Derivatives Market

47 Pages Posted: 10 Jun 2016

See all articles by Sudhakar Reddy Syamala

Sudhakar Reddy Syamala

Institute of Chartered Financial Analysts of India (ICFAI) - IBS - Hyderabad

V. N. Reddy

Institute of Chartered Financial Analysts of India (ICFAI) - The Icfai University (IFHE), Hyderabad

Abhinav Goyal

University of Liverpool - Management School (ULMS)

Date Written: Sept 8, 2014

Abstract

Using a sample of actively traded stocks and options from emerging order-driven market, this study examines and provides satisfactory evidence for the existence of commonality in liquidity for both spot and derivatives market. For equities; the market- and industry-wide commonality remain strong even after controlling for market returns and individual firm volatility and for options after accounting for the underlying stock market liquidity and implied volatility. Compared to the stock market, options market exhibit an increased commonality in liquidity with market capitalization. Here information asymmetry acts as an important microstructure related source of commonality in liquidity across markets. The findings are robust across call and put options with negligible evidence of cross-sectional error correlation for all the liquidity measures.

Keywords: Microstructure, commonality, liquidity, emerging order–driven market

JEL Classification: G12, G15

Suggested Citation

Syamala, Sudhakar Reddy and Reddy, Vanga Nagi and Goyal, Abhinav, Commonality in Liquidity: An Empirical Examination of Emerging Order–Driven Equity and Derivatives Market (Sept 8, 2014). Journal of International Financial Markets, Institutions and Money, Vol. 33, No. 317-334, 2014. Available at SSRN: https://ssrn.com/abstract=2792191

Sudhakar Reddy Syamala

Institute of Chartered Financial Analysts of India (ICFAI) - IBS - Hyderabad ( email )

62, Nagarjuna Hill
Panjagutta
Hyderabad, TX AP 501504
India

Vanga Nagi Reddy

Institute of Chartered Financial Analysts of India (ICFAI) - The Icfai University (IFHE), Hyderabad ( email )

Donthanapally Shankarapalli Road
RAJAWALA ROAD
Hyderabad, RI Andhra Pradesh 501203
India

Abhinav Goyal (Contact Author)

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom
+44-151-795-2150 (Phone)

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