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An Empirical Analysis of Stock and Bond Market Liquidity by Tarun Chordia, Asani Sarkar, Avanidhar Subrahmanyam is a nonfiction available to read on EtoBox.

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AbstractThis paper explores liquidity movements in stock and Treasury bond markets over aperiod of more than 1800 trading days. Cross-market dynamics in liquidity aredocumented by estimating a vector autoregressive model for liquidity (that is, bid-askspreads and depth), returns, volatility, and order flow in the stock and bond markets. Wefind that a shock to quoted spreads in one market affects the spreads in both markets, andthat return volatility is an important driver of liquidity. Innovations to stock and bondmarket liquidity and volatility prove to be significantly correlated, suggesting thatcommon factors drive liquidity and volatility in both markets. Monetary expansionincreases equity market liquidity during periods of financial crises, and unexpectedincreases (decreases) in the federal funds rate lead to decreases (increases) in liquidityand increases (decreases) in stock and bond volatility. Finally, we find that flows to thestock and government bond sectors play an important role in forecasting stock and bondliquidity. The results establish a link between “macro” liquidity, or money flows, and“micro” or transactions liquidity.

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Author

Tarun Chordia, Asani Sarkar, Avanidhar Subrahmanyam

Published

2003

Language

EN

Category

nonfiction

Subjects

Business, Econometrics