Uncovering the time-varying relationship between commonality in liquidity and volatility
- Autores: Helena Chuliá, Christoph Koser, Jorge Mario Uribe Gil
- Localización: Documents de Treball ( IREA ), Nº. 16, 2019
- Idioma: inglés
- Enlaces
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Resumen
This study examines the dynamic linkages between commonality in liquidity in international stock markets and market volatility. Using a recently proposed liquidity measure as input in a variance decomposition exercise, we show that innovations to liquidity in most markets are induced predominately by inter-market innovations. We also find that commonality in liquidity peaks immediately after large market downturns, coinciding with periods of crisis. The results from a dynamic Granger causality test indicate that the relationship between commonality in liquidity and market volatility is bi-directional and time-varying. We show that while volatility Granger-causes commonality in liquidity throughout the entire sample period, market volatility is enhanced by commonality in liquidity only in sub-periods. Our results are helpful for practitioners and policy makers.
