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Some hypotheses on commonality in liquidity: new evidence from the Chinese stock market

Version 2 2024-06-04, 00:16
Version 1 2015-09-11, 09:44
journal contribution
posted on 2024-06-04, 00:16 authored by PK Narayan, Z Zhang, Xinwei ZhengXinwei Zheng
In this article, we examine four specific hypotheses relating to commonality in liquidity on the Chinese stock markets. These hypotheses are (1) that market-wide liquidity determines liquidity of individual stocks; (2) that liquidity varies with firm size; (3) that sectoral-based liquidity affects individual stock liquidities differently; and (4) that commonality in liquidity has an asymmetric effect. Drawing on a two-year data set on the Shanghai and Shenzhen stock exchanges comprising over 34 million and 48 million transactions, respectively, we find strong support for commonality in liquidity and a greater influence of industry-wide liquidity in explaining liquidity of individual stocks. Moreover, our results suggest that of the three main sectors - financial, industrial, and resources - the industrial sectors liquidity is most important in explaining individual stock liquidities. Finally, we do not find any evidence of size effects and document an asymmetric effect of market-wide liquidity on liquidity of individual stocks.

History

Journal

Emerging markets finance and trade

Volume

51

Pagination

915-944

Location

Oxford, Eng.

ISSN

1540-496X

eISSN

1558-0938

Language

eng

Notes

School working paper (Deakin University. School of Accounting, Economics and Finance) ; 2010/10 In this paper, we examine four specific hypotheses relating to commonality in liquidity on the Chinese stock markets. These hypotheses are: (a) that market-wide liquidity determines liquidity of individual stocks; (b) that liquidity varies with firm size; (c) that sectoral-based liquidity affects individual stock liquidities differently; and (d) that commonality in liquidity has an asymmetric effect. Based on a two-year dataset on the Shanghai and Shenzhen stock exchanges comprising of over 34 and 48 million transactions respectively, we find strong support for commonality in liquidity and a greater influence of industry-wide liquidity in explaining liquidity of individual stocks. Moreover, our results suggest that of the three main sectors ? financial, industrial, and resources ? industrial sector?s liquidity is most important in explaining individual stock liquidities. Finally, we do not find any evidence of size effects, and document an asymmetric effect of market-wide liquidity on liquidity of individual stocks.

Publication classification

C Journal article, C1 Refereed article in a scholarly journal

Copyright notice

2015, Taylor & Francis

Issue

5

Publisher

Routledge

Place of publication

Geelong, Vic.