An Empirical Analysis of Stock and Bond Market Liquidity

An Empirical Analysis of Stock and Bond Market Liquidity 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

An Empirical Analysis of Stock and Bond Market Liquidity

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Publisher
Oxford University Press
Copyright
The Review of Financial Studies Vol. 18, No. 1 © 2005 The Society for Financial Studies; all rights reserved.
ISSN
0893-9454
eISSN
1465-7368
D.O.I.
10.1093/rfs/hhi010
Publisher site
See Article on Publisher Site

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.

Journal

The Review of Financial StudiesOxford University Press

Published: Nov 3, 2005

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