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Liquidity Commonality and its Causes: Evidence from the Korean Stock Market *
Author(s) -
Choe Hyuk,
Yang CheolWon
Publication year - 2010
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/j.2041-6156.2010.01025.x
Subject(s) - market liquidity , financial economics , information asymmetry , economics , volatility (finance) , stock (firearms) , order (exchange) , monetary economics , trading strategy , business , finance , mechanical engineering , engineering
This paper investigates the causes of liquidity commonality. We consider information asymmetry, volatility, utilitarian trading interest, style‐based trading, inventory cost, and investor sentiment as potential candidates. Our empirical analysis shows that greater information asymmetry causes higher liquidity commonality. The significant effect of the order imbalance beta supports our volatility hypothesis as a cause of liquidity commonality. Program trading and the KOSPI200 index dummy are positively related to liquidity commonality, which is consistent with the style‐based trading hypothesis. Higher individual trading is associated with higher liquidity commonality, which means that investor sentiment operates in the Korean market. However, volume beta and return beta, as proxies for the utilitarian trading effect and the inventory cost, respectively, are insignificantly related to liquidity commonality.