Liquidity commonality around the world

Abstract

This dissertation presents four stand-alone but interrelated research projects relating to market liquidity commonality. This dissertation answers four main research questions, being (i) whether and how liquidity commonality is a global phenomenon; (ii) what are the supply- and demand-side determinants of liquidity commonality, at the market- and firm-levels; (iii) is liquidity commonality priced; and (iv) what effect does international cross-listing have on liquidity commonality. The recent Global Financial Crisis has highlighted the importance of market liquidity. This dissertation is the first study to empirically test liquidity commonality around the world using new methodology and applying extensive datasets from 39 markets at both country- and firm-levels over a period of 12 years from 1996 to 2007. This study confirms that liquidity commonality is a global phenomenon. Liquidity commonality varies with market development and financial market integration, where commonality is more prominent in emerging markets and less prominent in developed markets, particularly within the eurozone markets which have a higher level of financial market integration. This study shows that liquidity commonality has common market- and firm-level supply-side and demand-side determinants, and that commonality is higher when there are worse economic and financial environments, high market and firm returns, inadequate investor protection, and an opaque information environment. The findings show that liquidity commonality is priced in developed markets, including in the EU, eurozone and US markets, but not priced in emerging markets. This study finds that liquidity commonality is priced higher in illiquid or volatile markets. This study also finds that post cross-listing, liquidity commonality decreases between stocks and their home markets, and increases between stocks and their host markets.