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The demand-side explanation for commonality in liquidity: The role of institutional ownership in the Taiwan Stock Exchange

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  • Lowe, Alpha

Abstract

In a sample of the Taiwan Stock Exchange (TWSE), this paper documents that stocks with greater liquidity commonality are related to higher aggregate ownership by qualified foreign institutional investors (QFIIs), mutual funds, and securities dealers. This positive ownership–commonality relation is more pronounced during market declines. Decomposing data for each of the three institutions reveals that ownership by securities dealers overshadows ownership by QFIIs or mutual funds in driving liquidity commonality on the TWSE. Moreover, the positive relation between commonality and ownership by QFIIs or securities dealers is stronger for large-cap stocks, whereas the positive effect of mutual fund ownership on commonality is more evident among small-cap stocks. These findings endorse the size effect, habitat-based explanations, and style-based explanations of liquidity commonality. Overall, this study bolsters demand-side explanations of commonality on the TWSE by finding that correlated trading among institutions generates co-movement in liquidity.

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  • Lowe, Alpha, 2014. "The demand-side explanation for commonality in liquidity: The role of institutional ownership in the Taiwan Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 59-85.
    • Handle: RePEc:eee:pacfin:v:29:y:2014:i:c:p:59-85
    DOI: 10.1016/j.pacfin.2014.03.008
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    3. Benzennou, Bouchra & ap Gwilym, Owain & Williams, Gwion, 2020. "Commonality in liquidity across options and stock futures markets," Finance Research Letters, Elsevier, vol. 32(C).

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    More about this item

    Keywords

    Taiwan Stock Exchange; Commonality in liquidity; Institutional ownership; Correlated trading;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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