61 Pages Posted: 1 Nov 2001
Date Written: March 2003
We study the joint time-series of daily liquidity in government bond and stock markets over the period 1991 to 1998. Innovations in liquidity are positively and significantly correlated across stock and bond markets. Further, order imbalances in the stock market impact bond and stock liquidity, even after controlling for order imbalances in the bond market. Both results suggest the existence of a common liquidity factor in stock and bond markets. We consider monetary conditions and mutual fund flows as sources of order flow and as primitive determinants of liquidity. Monetary expansion enhances stock market liquidity during crises. U.S. government bond funds see higher inflows and equity funds see higher outflows during financial crises, and these flows are associated with decreased liquidity in stock and bond markets. Our results establish a link between "macro" liquidity, or money flows, and "micro" or transactions liquidity.
JEL Classification: G10, G14, G23, E52
Suggested Citation: Suggested Citation
Chordia, Tarun and Sarkar, Asani and Subrahmanyam, Avanidhar, An Empirical Analysis of Stock and Bond Market Liquidity (March 2003). FRB NY Staff Report No. 164. Available at SSRN: https://ssrn.com/abstract=289219 or http://dx.doi.org/10.2139/ssrn.289219