71 Pages Posted: 11 Nov 2016 Last revised: 22 Aug 2017
Date Written: August 9, 2017
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: 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