An Empirical Analysis of Stock and Bond Market Liquidity

Posted: 29 Feb 2008

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

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Date Written: 2005

Abstract

This article explores cross-market liquidity dynamics by estimating a vector autoregressive model for liquidity (bid-ask spread and depth, returns, volatility, and order flow in the stock and Treasury bond markets). Innovations to stock and bond market liquidity and volatility are significantly correlated, implying that common factors drive liquidity and volatility in these markets. Volatility shocks are informative in predicting shifts in liquidity. During crisis periods, monetary expansions are associated with increased liquidity. Moreover, money flows to government bond funds forecast bond market liquidity. The results establish a link between "macro" liquidity, or money flows, and "micro" or transactions liquidity.

Suggested Citation

Chordia, Tarun, An Empirical Analysis of Stock and Bond Market Liquidity ( 2005). The Review of Financial Studies, Vol. 18, Issue 1, pp. 85-129, 2005, Available at SSRN: https://ssrn.com/abstract=900680

Tarun Chordia (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
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