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

Paresh Kumar Narayan, Zhichao Zhang, Xinwei Zheng

Research output: Contribution to journalArticleResearchpeer-review

18 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)915-944
Number of pages30
JournalEmerging Markets Finance and Trade
Volume51
Issue number5
DOIs
Publication statusPublished - 3 Sept 2015
Externally publishedYes

Keywords

  • asymmetric information
  • Chinese stock exchange
  • commonality in liquidity
  • size effects

Cite this