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Liquidity spillovers in the global stock markets: Lessons for risk management

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  • Muñoz Mendoza, Jorge A.
  • Ferreira, Guillermo
  • Márquez Sanders, Vicente A.

Abstract

This paper investigates the liquidity spillovers between 56 stock markets for the period from January 2, 2007 to August 12, 2022. Using high-dimensional data, we estimated a LASSO-VAR model to calculate liquidity spillovers across the diverse stock markets. Our results reveal that stock markets are significantly connected through the liquidity channel. This connectedness is mainly explained by variations in the entire system, which are dynamic and intensify during the periods of crisis or financial stress. Developed markets such as the United Kingdom, United States, Canada, and the Eurozone are the main transmitters of liquidity spillovers. However, emerging markets such as Brazil, Mexico, South Africa, Romania, and Bulgaria are also important transmitters of liquidity shocks and facilitate their propagation. Other emerging markets are the least vulnerable to shocks of this nature, and offer the best opportunities to diversify portfolios internationally and contain financial contagion. These results are relevant for investors, market makers, and regulators due to their implications for investment decision-making, as well as for financial regulation design.

Suggested Citation

  • Muñoz Mendoza, Jorge A. & Ferreira, Guillermo & Márquez Sanders, Vicente A., 2023. "Liquidity spillovers in the global stock markets: Lessons for risk management," Global Finance Journal, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:glofin:v:58:y:2023:i:c:s1044028323000911
    DOI: 10.1016/j.gfj.2023.100896
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    More about this item

    Keywords

    Liquidity; Spillovers; Connectedness; Network;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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