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Subject: search.filters.subject.Liquidity (Economics)

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    Essays on the dynamics of liquidity networks : a thesis presented in fulfilment of the requirement for the degree of Doctor of Philosophy in Finance at Massey University, Albany, New Zealand
    (Massey University, 2023) Farzami, Foroogh
    This dissertation presents three essays on liquidity interrelationships between firms in the Standard and Poor's 500 (S&P500) index using network theory. Liquidity is the ease of trading securities in the financial market. It varies over time and differs significantly across firms. The principal challenge for market participants is the variability and uncertainty in liquidity. In simple terms, market liquidity risk relates to the inability to trade at a fair price with immediacy. Many studies investigate liquidity co-movement of assets and the associated risk. However, almost no empirical work has been devoted to investigating the possibility of liquidity interrelationship through a liquidity network. In the first essay, I investigate if a liquidity network among 1,174 firms included in the S&P500 exists using 30 years of data, employing a lead-lag liquidity network method to analyse liquidity interrelationships beyond contemporaneous spillover effects. I find an intertemporal liquidity network where 84% of the firms exhibit statistically significant connectivity in at least one direction during the sample period. The degree and manner of liquidity communication vary across the firms and are dynamic over time. Furthermore, I show that individual firms' characteristics, such as the level and change in liquidity, firm size, and return volatility, can explain their network structure. The outcome emphasizes the fragility of the liquidity system through the firms' connectivity which can be a new factor to consider when evaluating firms' expected rate of return. The second essay explores the relationship between the firm-level liquidity shock transmission through the liquidity network and the role that firm-size plays in the transmission process. I find that the transmission of the liquidity shock depends on the firm size. The greater intensity shocks influence the transmission more through larger firms than small firms. I also find that with one unit increase in the size differences between firms, the odds of firms not being connected in the network increases by 2.5%, suggesting similar-size firms tend to have more connectivity. Furthermore, looking at size-based portfolios, I find that although all the portfolios transmit shock significantly to one another, their explanatory power varies. Most portfolios tend to send out more shocks to the next largest quantiles. The outcome overall suggests that diversification against liquidity shock transmission is possible by including different firm sizes. Finally, I investigate the impact of the COVID-19 pandemic on liquidity interlinkages of U.S. industry groups. I document that sectors differ in their liquidity interactions during the pre-COVID period, with some sectors more interlinked than others. I also document that the crisis induced by COVID-19 had a significant effect on the liquidity network, with virtually all sectors becoming more interconnected relative to the pre-COVID period. The effect varies across industries, with the real estate sector being the most affected and telecommunication services the least. Overall, due to higher interconnectedness, liquidity risk became harder to diversify.
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    Essays on portfolio liquidity : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Finance at Massey University, Auckland, New Zealand
    (Massey University, 2021) Pham, Son
    Prior research focuses on the liquidity of individual assets such as stocks, bonds, etc. In more recent times, with the robust growth of basket products such as exchange-traded funds (ETFs) or futures, researchers have shifted their attention to the liquidity of a portfolio of assets. When being traded on a stock exchange, a portfolio incurs trading costs like stock. However, unlike stock, the market liquidity of a portfolio is affected by its degree of diversification and pricing error. This thesis consists of three essays and contributes to the literature on portfolio liquidity. Essay One investigates the market liquidity of active ETF, a renovated and fast-growing basket product. Essay Two examines the extent to which transaction costs in trading ETFs can be minimized via a systematic trading schedule. Finally, essay Three studies the spillover between the market liquidity of an ETF and the liquidity of its underlying stocks.
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    Essays on international market liquidity : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Finance at Massey University, Palmerston North, New Zealand
    (Massey University, 2018) Ma, Rui
    Liquidity, or the ease to trade an asset in a timely, low-cost manner, is an important dimension of financial markets for investors, regulators, and academics. This thesis contributes to the literature on liquidity issues in international stock markets. The first essay surveys prior research on international stock market liquidity. The essay concludes by pointing out that while trading environments and techniques continue to evolve, the manner in which market-specific characteristics affect empirical findings on liquidity issues remains an important area for future research. The next two essays examine market- and stock-level liquidity from a global perspective. Essay Two finds that investors’ risk perceptions are an important determinant of stock market liquidity internationally, and the impact of risk perceptions is stronger in more developed markets with better country governance, greater trade openness, and no short-selling constraints. It is also stronger in countries with a more individualistic culture. Based on an international setting, Essay Three finds that stock liquidity is an important channel through which market volatility affects stock returns, and shows this is distinct from the direct volatility-return relation. The influence of the liquidity channel in determining stocks returns is more pronounced in markets with higher levels of market volatility, lower trading volume, better governance, and no short-selling constraints. It is also stronger when high-frequency trading is more active and during financial crisis periods. Both essays are consistent with prior literature suggesting that more developed markets with less market friction are able to impound information in stock markets more efficiently. The final essay in the thesis examines the trading activity and market liquidity in China. Given China’s unique institutional and regulatory features, liquidity and trading activity evidence may deviate from that of other markets, such as the United States. The essay documents anomalous trading behaviour in China, and shows the findings can be partially explained by the overrepresentation of retail investors’ trading.
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    Liquidity and stock returns in order driven markets : a thesis presented in partial fulfilment of the requirements for the degree of Master of Business Studies in Finance at Massey University
    (Massey University, 1999) Marshall, Ben
    This thesis examines the relationship between liquidity and stock returns in the New Zealand and Australian stock markets, for the periods of 1993 to 1998 and 1994 to 1998 respectively. There is evidence to suggest that investors are compensated for holding less liquid stocks with higher returns. However, this is the first study (that the author is aware of) to test the return-liquidity relationship in pure order driven stock exchanges. The combined use of bid-ask spread, turnover rate, and amortised spread as proxies for liquidity, also makes this study unique. Previous studies have investigated the return-liquidity relationship using only one or two of these proxies. In addition to liquidity, other factors that have been found by previous researchers to influence stock returns, such as beta, size, and book-to-market equity are also considered. Seemingly Unrelated Regressions (SUR) and a variant of the General Pooled Cross-Sectional Time-Series Model, known as the Cross Sectionally Correlated Timewise Autoregressive (CSCTA) Model, form the methodological basis for this research. A small liquidity premium is found in both markets. This premium persists for the entire year in the Australian market, while in the New Zealand market the premium is only evident in the month of January. There is strong evidence of a negative size effect in Australia. In New Zealand, there is weak evidence of a negative size effect in the month of January. The returns of high book-to-market equity (value) firms are found to be larger than those of their low book-to- market equity (growth) firm counterparts in New Zealand.