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

Abstract

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.