Determinants of commonality in liquidity: Evidence from an order-driven emerging market |
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| Institution: | 1. IBS Hyderabad, IFHE University, India;2. University of Liverpool Management School, University of Liverpool, UK;1. Centre for Investment Research, University College Cork, Ireland;2. Department of Accounting, Finance and Information Systems and Centre for Investment Research, University College Cork, Ireland;3. School of Economics and Centre for Investment Research, University College Cork, Ireland;1. Fudan University, Shanghai, China;2. School of Economics, Finance and Marketing, RMIT University, Melbourne, Australia;3. Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Shanghai, China;4. University of New South Wales, Sydney, NSW, Australia |
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| Abstract: | Using an extensive, time-series, cross-sectional data-set of actively traded Indian stocks with up to 1.75 million firm-day observations, we discern the key determinants of commonality in liquidity among emerging markets. The paper shows evidence for both supply-side and demand-side factors contributing to liquidity commonality. However, the results are more supportive towards supply-side rationale for liquidity commonality among the firms where regulators and banks play an important source of commonality in liquidity, especially during market turmoil. Results are partially driven by the fact that the Indian stick exchange is an order-driven market. Economic activities like cheap exports and undervalued currency, rather than correlated trading by the institutional investors determine the demand for liquidity. These findings endorse the effect of high firm value, market return, liquidity, volatility, turnover, and alternate proxies of commonality in liquidity estimation. |
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| Keywords: | Microstructure Commonality Liquidity Emerging order–driven market |
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