Liquidity Commonality in the London Stock Exchange

Emilios Galariotis · Evangelos Giouvris

48 citations0/0 files storedJournal of Business Finance &amp Accounting

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Risk and Volatility Modeling

Abstract

Abstract: A number of events such as the international market crash of October 1987 and the 1997 East Asian crisis show that individual firm liquidity is affected by market‐wide factors. However, research in systematic liquidity is still at an embryonic stage and given the gap in the literature, the paper offers first time evidence (to the best of our knowledge) on the presence of systematic liquidity in the UK using FTSE100 and FTSE250 stocks. The unique setting of the London Stock Exchange as regards changes in trading regimes, allows an original answer as to whether changes in the nature of market making from obligatory to non‐obligatory, affect commonality in liquidity. Results indicate that commonality is quite strong for FTSE100 stocks at individual and portfolio level, while for the FTSE250 it is strong only at portfolio level. Overall commonality is on average similar across trading regimes, irrespective of the nature of the provision of liquidity.

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References

2002Illiquidity and stock returns: cross-section and time-series effects 2003Liquidity Risk and Expected Stock Returns 1986Asset pricing and the bid-ask spread 2005Asset pricing with liquidity risk 2000Commonality in liquidity 1996Market microstructure and asset pricing: On the compensation for illiquidity in stock returns 1998Liquidity and stock returns: An alternative test 2001Common factors in prices, order flows, and liquidity

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