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Commonality under market stress: Evidence from an order-driven market

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  • Brockman, Paul
  • Chung, Dennis Y.

Abstract

Recent evidence shows that commonality in liquidity decreases at the aggregate level in a quote-driven specialist market during periods of market stress. Specialists and dealers in quote-driven markets have an affirmative obligation to provide liquidity, even if prices are falling precipitously. The purpose of our study is to investigate commonality in liquidity in a market structure without any affirmative obligation to provide liquidity (i.e., in an order-driven market). We collect intra-day data from one of the world's largest and most active order-driven markets, the Stock Exchange of Hong Kong (SEHK), and find that commonality increases during periods of market stress. We also show that larger firms tend to be more susceptible to changes in commonality than smaller firms. We hypothesize that order-driven markets behave differently from quote-driven markets under stress because order-driven market makers have a free exit option.

Suggested Citation

  • Brockman, Paul & Chung, Dennis Y., 2008. "Commonality under market stress: Evidence from an order-driven market," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 179-196.
    • Handle: RePEc:eee:reveco:v:17:y:2008:i:2:p:179-196
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    References listed on IDEAS

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    6. Miralles Marcelo, José Luis & Miralles Quirós, María Del Mar & Oliveira, Célia, 2015. "Systematic liquidity: commonality and inter-temporal variation in the Portuguese stock market," Cuadernos de Gestión, Universidad del País Vasco - Instituto de Economía Aplicada a la Empresa (IEAE).
    7. Modena, Matteo & Linciano, Nadia & Gentile, Monica & Fancello, Francesco, 2014. "The liquidity of dual-listed corporate bonds: empirical evidence from Italian markets," MPRA Paper 62479, University Library of Munich, Germany, revised 23 Feb 2015.
    8. Giovanni Petrella & Andrea Resti, 2016. "An empirical analysis of Eurozone government bonds liquidity: Determinants, predictability and implications for the new bank prudential rules," BAFFI CAREFIN Working Papers 1645, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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