Impact of Policy Uncertainty on Stock Liquidity: Cross-sectional Effects and Economic Channels

49 Pages Posted: 20 Dec 2017 Last revised: 17 Dec 2019

See all articles by Huu Nhan Duong

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Chandra Krishnamurti

University of Southern Queensland

Justin Hung Nguyen

Victoria University of Wellington

My Nguyen

RMIT- School of Economics, Finance and Marketing

S. Ghon Rhee

University of Hawaii at Manoa - Shidler College of Business; University of Hawaii at Manoa - Department of Financial Economics and Institutions

Date Written: January 16, 2018

Abstract

We document a negative impact of policy uncertainty on stock liquidity. The impact is stronger for firms whose returns are more sensitive to policy uncertainty or those with higher levels of political risk, and more government dependency. Policy uncertainty affects stock liquidity via three channels. First, stocks with higher information asymmetry are more adversely affected by policy uncertainty. Second, policy uncertainty affects cash flow risk and return volatility, which results in an exacerbation of stock illiquidity. Finally, policy uncertainty worsens funding liquidity, leading to lower stock liquidity. Overall, our findings highlight the importance of policy uncertainty on secondary market liquidity.

Keywords: Policy Uncertainty, Stock Liquidity, Information Asymmetry, Cash-flow Risk, Funding Liquidity

JEL Classification: G14, G18, G34

Suggested Citation

Duong, Huu Nhan and Krishnamurti, Chandra and Nguyen, Justin Hung and Nguyen, My and Rhee, S. Ghon, Impact of Policy Uncertainty on Stock Liquidity: Cross-sectional Effects and Economic Channels (January 16, 2018). Available at SSRN: https://ssrn.com/abstract=3088922 or http://dx.doi.org/10.2139/ssrn.3088922

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Chandra Krishnamurti

University of Southern Queensland ( email )

P.O.Box 238 Darling Heights
Toowoomba, Queensland 4350
Australia

Justin Hung Nguyen (Contact Author)

Victoria University of Wellington ( email )

23 Lambton Quay
Pipitea
Wellington, 6011
New Zealand

My Nguyen

RMIT- School of Economics, Finance and Marketing ( email )

445 Swanston Street
Melbourne, Victoria 3001
Australia
+61 3 9925 5450 (Phone)

S. Ghon Rhee

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii at Manoa - Department of Financial Economics and Institutions ( email )

United States

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