Systematic liquidity: commonality and inter-temporal variation in the Portuguese stock market
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Published
18-09-2018
José Luis Miralles Marcelo
María del Mar Miralles Quirós
Celia Oliveira
Abstract
The aim of this paper is to study systematic liquidity at the Euronext Lisbon Stock Exchange. The motivation for this research is provided by the growing interest in financial literature about stock liquidity and the implications of commonality in liquidity for asset pricing since it could represent a source of non-diversifiable risk. Namely, it is analysed whether there exist common factors that drive the variation in individual stock liquidity and the causes of the inter-temporal variation of aggregate liquidity. Monthly data for the period between January 1988 and December 2011 is used to compute some of the most used proxies for liquidity: bid-ask spreads, turnover rate, trading volume, proportion of zero returns and the illiquidity ratio. Following Chordia et al. (2000) methodology, some evidence of commonality in liquidity is found in the Portuguese stock market when the proportion of zero returns is used as a measure of liquidity. In relation to the factors that drive the inter-temporal variation of the Portuguese stock market liquidity, the results obtained within a VAR framework suggest that changes in real economy activity, monetary policy (proxied by changes in monetary aggregate M1) and stock market returns play an important role as determinants of commonality in liquidity.
How to Cite
Miralles Marcelo, J. L., Miralles Quirós, M. del M., & Oliveira, C. (2018). Systematic liquidity: commonality and inter-temporal variation in the Portuguese stock market. Cuadernos De Gestión, 15(2), 39–64. https://doi.org/10.5295/cdg.140472mm
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Keywords
Stock market, liquidity, commonality, macroeconomic factors, Portugal, vector autoregression
References
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Amihud, Y., 2002. Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets, 5, 31-56.
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Brockman, P. and Chung, D. Y., 2002. Commonality in liquidity: Evidence from an orderdriven market structure. Journal of Financial Research, 25, 521-539.
Brockman, P. and Chung, D. Y., 2006. Index inclusion and commonality in liquidity: Evidence from the stock exchange of Hong Kong. International Review of Financial Analysis, 15, 291-305.
Brockman, P. and Chung, D. Y., 2008. Commonality under market stress: Evidence from an order-driven market. International Review of Economics and Finance, 17, 179-196.
Campbell, J. Y., Grossman, S. J. and Wang, J., 1993. Trading volume and serial correlation in stock returns. The Quarterly Journal of Economics, 108, 905-939.
Chan, H. W. and Faff, R. W., 2003. An investigation into the role of liquidity in asset pricing: Australian evidence. Pacific-Basin Finance Journal, 11, 555-572.
Chan, H. W. and Faff, R. W., 2005. Asset pricing and the illiquidity premium. The Financial Review, 40, 429-458.
Choi, W. G. and Cook, D., 2006. Stock market liquidity and the macroeconomy: Evidence from Japan. In: Ito, T. and Rose, A. K. (eds.) Monetary Policy under Very Low Inflation in the Pacific Rim, NBER East Asia Seminar on Economics. Chicago: University of Chicago Press.
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Chordia, T., Roll, R. and Subrahmanyam, A., 2001. Market liquidity and trading activity. The Journal of Finance, 56, 501-530.
Chordia, T., Sarkar, A. and Subrahmanyam, A., 2005. An empirical analysis of stock and bond market liquidity. The Review of Financial Studies, 18, 85-129.
Datar, V. T., Naik, N. Y. and Radcliffe, R., 1998. Liquidity and stock returns: An alternative test. Journal of Financial Markets, 1, 203-219.
Eleswarapu, V. R. and Reinganum, M. R., 1993. The seasonal behavior of the liquidity premium in asset pricing. Journal of Financial Economics, 34, 373-386.
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Fabre, J. and Frino, A., 2004. Commonality in liquidity: Evidence from the Australian Stock Exchange. Accounting and Finance, 44, 357-368.
Fernández-Amador, O., Gächter, M., Larch, M. and Peter, G., 2013. Does monetary policy determine stock market liquidity? New evidence from the euro zone. Journal of Empirical Finance, 21, 54-68.
Galariotis, E. C. and Giouvris, E., 2007. Liquidity commonality in the London Stock Exchange. Journal of Business Finance and Accounting, 34, 374-388.
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Goyenko, R. Y., Holden, C. W. and Trzcinka, C. A., 2009. Do liquidity measures measure liquidity? Journal of Financial Economics, 92, 153-181.
Goyenko, R. Y. and Ukhov, A. D., 2009. Stock and bond market liquidity: A long-run empirical analysis. Journal of Financial and Quantitative Analysis, 44, 189-212.
Hameed, A., Kang, W. and Viswanathan, S., 2010. Stock market declines and liquidity. The Journal of Finance, 65, 257-293.
Hasbrouck, J. and Seppi, D. J., 2001. Common factors in prices, order flows, and liquidity. Journal of Financial Economics, 59, 383-411.
Huberman, G. and Halka, D., 2001. Systematic liquidity. Journal of Financial Research, 24, 161-178.
Jensen, G. R. and Moorman, T., 2010. Inter-temporal variation in the illiquidity premium. Journal of Financial Economics, 98, 338-358.
Kamara, A., Lou, X. and Sadka, R., 2008. The divergence of liquidity commonality in the cross-section of stocks. Journal of Financial Economics, 89, 444-466.
Keene, M. A. and Peterson, D. R., 2007. The importance of liquidity as a factor in asset pricing. Journal of Financial Research, 30, 91-109.
Kempf, A. and Mayston, D., 2008. Liquidity commonality beyond best prices. Journal of Financial Research, 31, 25-40.
Korajczyk, R. A. and Sadka, R., 2008. Pricing the commonality across alternative measures of liquidity. Journal of Financial Economics, 87, 45-72.
Kyle, A. S., 1985. Continuous auctions and insider trading. Econometrica, 53, 1315-1335.
Lee, K.-H., 2011. The world price of liquidity risk. Journal of Financial Economics, 99, 136-161.
Lesmond, D. A., 2005. Liquidity of emerging markets. Journal of Financial Economics, 77, 411-452.
Lesmond, D. A., Ogden, J. P. and Trzcinka, C. A., 1999. A new estimate of transaction costs. The Review of Financial Studies, 12, 1113-1141.
Lu, R. and Glascock, J. 2010. Macroeconomic effects on stock liquidity. Working Paper. Available at: http://ssrn.com/abstract=1662751 [Access 20 April 2015].
Martínez, M. A., Nieto, B., Rubio, G. and Tapia, M., 2005. Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market. International Review of Economics and Finance, 14, 81-103.
Mello, A. S. and Escalda, A., 1994. Is there a size effect or a liquidity premium in Portuguese stocks? Quarterly Bulletin of the Central Bank of Portugal, 16, 55-64.
Miralles-Marcelo, J. L., Miralles-Quirós, J. L. and Miralles-Quirós, M. M., 2007. Causas macroeconómicas de las fluctuaciones en la liquidez del mercado bursátil español. Información Comercial Española, Revista de Economía, 195-208.
Miralles-Marcelo, J. L. and Miralles-Quirós, M. M., 2004. An empirical analysis of the systematic liquidity risk in the Spanish stock market. Portuguese Journal of Management Studies, 9, 91-102.
Miralles-Marcelo, J. L. and Miralles-Quirós, M. M., 2006. The role of an illiquidity risk factor in asset pricing: Empirical evidence from the Spanish stock market. The Quarterly Review of Economics and Finance, 46, 254-267.
Næs, R., Skjeltorp, J. A. and Ødegaard, B. A., 2011. Stock market liquidity and the business cycle. The Journal of Finance, 66, 139-176.
Pástor, L. and Stambaugh, R. F., 2003. Liquidity risk and expected stock retums. The Journal of Political Economy, 111, 642-685.
Pukthuanthong-Le, K. and Visaltanachoti, N., 2009. Commonality in liquidity: Evidence from the stock exchange of Thailand. Pacific-Basin Finance Journal, 17, 80-99.
Söderberg, J. 2008. Do macroeconomic variables forecast changes in liquidity? An outof-sample study on the order-driven stock markets in Scandinavia. Conference on Liquidity: Concepts and Risks. Munich.
Sujoto, C., Kalev, P. and Faff, R., 2008a. An examination of commonality in liquidity: New evidence from the Australian stock exchange. Journal for Studies in Economics and Econometrics, 32, 55-79.
Sujoto, C., Kalev, P. and Faff, R., 2008b. Systematic liquidity in the long run. Applied Financial Economics Letters, 4, 187-191.
Watanabe, A. 2004. Macroeconomic sources of systematic liquidity. Working Paper. School of Business, University of Alberta.
Amihud, Y., 2002. Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets, 5, 31-56.
Amihud, Y. and Mendelson, H., 1986. Asset pricing and the bid-ask spread. Journal of Financial Economics, 17, 223-249.
Amihud, Y. and Mendelson, H., 1989. The effects of beta, bid-ask spread, residual risk, and size on stock returns. The Journal of Finance, 44, 479-486.
Bekaert, G., Harvey, C. R. and Lundblad, C., 2007. Liquidity and expected returns: Lessons from emerging markets. The Review of Financial Studies, 20, 1783-1831.
Brennan, M. J. and Subrahmanyam, A., 1996. Market microstructure and asset pricing: On the compensation for illiquidity in stock returns. Journal of Financial Economics, 41, 441-464.
Brockman, P. and Chung, D. Y., 2002. Commonality in liquidity: Evidence from an orderdriven market structure. Journal of Financial Research, 25, 521-539.
Brockman, P. and Chung, D. Y., 2006. Index inclusion and commonality in liquidity: Evidence from the stock exchange of Hong Kong. International Review of Financial Analysis, 15, 291-305.
Brockman, P. and Chung, D. Y., 2008. Commonality under market stress: Evidence from an order-driven market. International Review of Economics and Finance, 17, 179-196.
Campbell, J. Y., Grossman, S. J. and Wang, J., 1993. Trading volume and serial correlation in stock returns. The Quarterly Journal of Economics, 108, 905-939.
Chan, H. W. and Faff, R. W., 2003. An investigation into the role of liquidity in asset pricing: Australian evidence. Pacific-Basin Finance Journal, 11, 555-572.
Chan, H. W. and Faff, R. W., 2005. Asset pricing and the illiquidity premium. The Financial Review, 40, 429-458.
Choi, W. G. and Cook, D., 2006. Stock market liquidity and the macroeconomy: Evidence from Japan. In: Ito, T. and Rose, A. K. (eds.) Monetary Policy under Very Low Inflation in the Pacific Rim, NBER East Asia Seminar on Economics. Chicago: University of Chicago Press.
Chordia, T., Roll, R. and Subrahmanyam, A., 2000. Commonality in liquidity. Journal of Financial Economics, 56, 3-28.
Chordia, T., Roll, R. and Subrahmanyam, A., 2001. Market liquidity and trading activity. The Journal of Finance, 56, 501-530.
Chordia, T., Sarkar, A. and Subrahmanyam, A., 2005. An empirical analysis of stock and bond market liquidity. The Review of Financial Studies, 18, 85-129.
Datar, V. T., Naik, N. Y. and Radcliffe, R., 1998. Liquidity and stock returns: An alternative test. Journal of Financial Markets, 1, 203-219.
Eleswarapu, V. R. and Reinganum, M. R., 1993. The seasonal behavior of the liquidity premium in asset pricing. Journal of Financial Economics, 34, 373-386.
Escalda, A., 1993. Risco e liquidez - Uma análise do mercado accionista português. Master Thesis, Universidade Técnica de Lisboa, Instituto Superior de Economia e Gestão.
Fabre, J. and Frino, A., 2004. Commonality in liquidity: Evidence from the Australian Stock Exchange. Accounting and Finance, 44, 357-368.
Fernández-Amador, O., Gächter, M., Larch, M. and Peter, G., 2013. Does monetary policy determine stock market liquidity? New evidence from the euro zone. Journal of Empirical Finance, 21, 54-68.
Galariotis, E. C. and Giouvris, E., 2007. Liquidity commonality in the London Stock Exchange. Journal of Business Finance and Accounting, 34, 374-388.
Gervais, S., Kaniel, R. and Mingelgrin, D. H., 2001. The high-volume return premium. The Journal of Finance, 56, 877-919.
Goyenko, R. Y., Holden, C. W. and Trzcinka, C. A., 2009. Do liquidity measures measure liquidity? Journal of Financial Economics, 92, 153-181.
Goyenko, R. Y. and Ukhov, A. D., 2009. Stock and bond market liquidity: A long-run empirical analysis. Journal of Financial and Quantitative Analysis, 44, 189-212.
Hameed, A., Kang, W. and Viswanathan, S., 2010. Stock market declines and liquidity. The Journal of Finance, 65, 257-293.
Hasbrouck, J. and Seppi, D. J., 2001. Common factors in prices, order flows, and liquidity. Journal of Financial Economics, 59, 383-411.
Huberman, G. and Halka, D., 2001. Systematic liquidity. Journal of Financial Research, 24, 161-178.
Jensen, G. R. and Moorman, T., 2010. Inter-temporal variation in the illiquidity premium. Journal of Financial Economics, 98, 338-358.
Kamara, A., Lou, X. and Sadka, R., 2008. The divergence of liquidity commonality in the cross-section of stocks. Journal of Financial Economics, 89, 444-466.
Keene, M. A. and Peterson, D. R., 2007. The importance of liquidity as a factor in asset pricing. Journal of Financial Research, 30, 91-109.
Kempf, A. and Mayston, D., 2008. Liquidity commonality beyond best prices. Journal of Financial Research, 31, 25-40.
Korajczyk, R. A. and Sadka, R., 2008. Pricing the commonality across alternative measures of liquidity. Journal of Financial Economics, 87, 45-72.
Kyle, A. S., 1985. Continuous auctions and insider trading. Econometrica, 53, 1315-1335.
Lee, K.-H., 2011. The world price of liquidity risk. Journal of Financial Economics, 99, 136-161.
Lesmond, D. A., 2005. Liquidity of emerging markets. Journal of Financial Economics, 77, 411-452.
Lesmond, D. A., Ogden, J. P. and Trzcinka, C. A., 1999. A new estimate of transaction costs. The Review of Financial Studies, 12, 1113-1141.
Lu, R. and Glascock, J. 2010. Macroeconomic effects on stock liquidity. Working Paper. Available at: http://ssrn.com/abstract=1662751 [Access 20 April 2015].
Martínez, M. A., Nieto, B., Rubio, G. and Tapia, M., 2005. Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market. International Review of Economics and Finance, 14, 81-103.
Mello, A. S. and Escalda, A., 1994. Is there a size effect or a liquidity premium in Portuguese stocks? Quarterly Bulletin of the Central Bank of Portugal, 16, 55-64.
Miralles-Marcelo, J. L., Miralles-Quirós, J. L. and Miralles-Quirós, M. M., 2007. Causas macroeconómicas de las fluctuaciones en la liquidez del mercado bursátil español. Información Comercial Española, Revista de Economía, 195-208.
Miralles-Marcelo, J. L. and Miralles-Quirós, M. M., 2004. An empirical analysis of the systematic liquidity risk in the Spanish stock market. Portuguese Journal of Management Studies, 9, 91-102.
Miralles-Marcelo, J. L. and Miralles-Quirós, M. M., 2006. The role of an illiquidity risk factor in asset pricing: Empirical evidence from the Spanish stock market. The Quarterly Review of Economics and Finance, 46, 254-267.
Næs, R., Skjeltorp, J. A. and Ødegaard, B. A., 2011. Stock market liquidity and the business cycle. The Journal of Finance, 66, 139-176.
Pástor, L. and Stambaugh, R. F., 2003. Liquidity risk and expected stock retums. The Journal of Political Economy, 111, 642-685.
Pukthuanthong-Le, K. and Visaltanachoti, N., 2009. Commonality in liquidity: Evidence from the stock exchange of Thailand. Pacific-Basin Finance Journal, 17, 80-99.
Söderberg, J. 2008. Do macroeconomic variables forecast changes in liquidity? An outof-sample study on the order-driven stock markets in Scandinavia. Conference on Liquidity: Concepts and Risks. Munich.
Sujoto, C., Kalev, P. and Faff, R., 2008a. An examination of commonality in liquidity: New evidence from the Australian stock exchange. Journal for Studies in Economics and Econometrics, 32, 55-79.
Sujoto, C., Kalev, P. and Faff, R., 2008b. Systematic liquidity in the long run. Applied Financial Economics Letters, 4, 187-191.
Watanabe, A. 2004. Macroeconomic sources of systematic liquidity. Working Paper. School of Business, University of Alberta.
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