Market Volatility, Liquidity Shocks, and Stock Returns: Worldwide Evidence

We examine the interaction between market volatility, liquidity shocks, and stock returns in 41 countries over the period 1990–2015. We find liquidity is an important channel through which market volatility affects stock returns in international markets and we show this is distinct from the direct volatility–return relation. The influence of the liquidity channel on the link between market volatility and returns is stronger in markets exhibiting higher levels of market volatility and lower trading volume. It is also stronger in countries with better governance, no short-selling constraints, and more high-frequency trading and during crisis periods.

Keywords: market volatility, liquidity, returns, international stock markets

JEL Classification: G12, G15, G18

Suggested Citation: Suggested Citation

Ma, Rui and Anderson, Hamish D. and Marshall, Ben R., Market Volatility, Liquidity Shocks, and Stock Returns: Worldwide Evidence (November 9, 2017). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018, Available at SSRN: https://ssrn.com/abstract=3067801 or http://dx.doi.org/10.2139/ssrn.3067801