International stock market liquidity
This dissertation contributes to the international asset pricing literature. The research it presents in its two essays is related to papers that investigate commonalities in individual stock liquidity in the domestic US setting, to research that estimates risk premia related to liquidity risk in the US, and to articles that explore properties and determinants of market-wide liquidity in the US, while expanding the scope to an international setting. The first essay shows that individual liquidity exhibits commonalities in monthly measures of individual stock liquidity within and across countries for a sample from Japan, the UK, and the US from 1980 to 2001. An asset pricing analysis suggests that expected stock returns are cross-sectionally related to the sensitivity of returns to shocks in global liquidity in this sample and that global liquidity is a priced state variable in an international framework at the portfolio as well as at the individual stock level. The second essay analyzes cross-regional and time-series properties of weekly market-wide liquidity measures from 1990 to 2002 for five regional aggregates: developed Asia, North America, Europe, emerging Asia, and emerging America. The aggregates are calculated from a sample that contains 39 developed and emerging countries. The results suggest that liquidity shocks are contemporaneously correlated and dynamically spread across regions. However, there is only week evidence that liquidity affects returns in this sample. An investigation of determinants of liquidity indicates that market-wide returns, market-wide averages of individual stock volatilities, and world net bond flows are fundamental drivers of market-wide liquidity. There is little evidence that equity fund flows and interest rates consistently affect liquidity in the sample. Even though changes in liquidity can to some extent be explained by returns and other determinants, shocks to liquidity continue to be contemporaneously correlated across markets. But the empirical results from an application of extreme value theory offers evidence that extreme shocks to liquidity are asymmetrically correlated in the tail of the distribution. In particular, it is mostly negative extreme liquidity shocks that are correlated between North America, Europe, and emerging America. The overall conclusions from this dissertation are twofold. First, changes in global liquidity constitutes an international risk factor, and financial assets with returns that are more sensitive to this factor reward investors with higher expected returns. However, the contribution of liquidity risk to expected returns seems to be more relevant for developed markets. Second, market-wide liquidity is contemporaneously and dynamically related across regions. Furthermore, these relationships do not simply reflect other variables that are related across markets but constitute a phenomenon by themselves.
School:The Ohio State University
School Location:USA - Ohio
Source Type:Master's Thesis
Keywords:stock market liquidity asset pricing risk premium var multivariate garch evt peak over threshold models
Date of Publication:01/01/2004