Systematic Liquidity and Leverage

71 Pages Posted: 11 Nov 2016 Last revised: 22 Aug 2017

Bige Kahraman

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR)

Heather Tookes

Yale University - Yale School of Management; Yale University - International Center for Finance

Date Written: August 9, 2017

Abstract

Does trader leverage exacerbate the liquidity comovement that we observe during crises? We exploit the threshold rules governing margin trading eligibility in India to identify a causal relationship between trader leverage and the extent to which a stock’s liquidity covaries with the liquidity of other stocks. We find that trader leverage causes sharp increases in liquidity comovement during severe market downturns, explaining about one third of the increase in liquidity commonality that we observe during crises. Consistent with downward price pressure due to deleveraging, we also find that trader leverage causes stocks to exhibit large increases in return comovement during these periods of market stress.

Keywords: Trader leverage, Systematic Liquidity

Suggested Citation

Kahraman, Bige and Tookes, Heather, Systematic Liquidity and Leverage (August 9, 2017). Saïd Business School WP 2016-27. Available at SSRN: https://ssrn.com/abstract=2868007 or http://dx.doi.org/10.2139/ssrn.2868007

Bige Kahraman (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Heather Tookes

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

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