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Through stormy seas: how fragile is liquidity across asset classes and time?

Author

Listed:
  • Nihad Aliyev
  • Matteo Aquilina
  • Khaladdin Rzayev
  • Sonya Zhu

Abstract

Market liquidity across asset classes has considerably increased in recent decades. Our study of stocks, foreign exchange (FX), and government bonds in the US, Europe, and Japan - using 25 years of high-frequency data - reveals a significant decline in both the average and standard deviation of bid-ask spreads across all asset classes. However, we also observe an increase in its skewness and kurtosis in equity and bond markets, indicating more frequent episodes of illiquidity. In contrast, FX markets do not show a significant increase in the higher moments of the distribution of bid-ask spreads. We identify structural breaks in the time series of spread distributions across regions and asset classes, associate these breaks with macroeconomic shocks and changing market conditions, and quantify the cost of this fragility to investors.

Suggested Citation

  • Nihad Aliyev & Matteo Aquilina & Khaladdin Rzayev & Sonya Zhu, "undated". "Through stormy seas: how fragile is liquidity across asset classes and time?," BIS Working Papers 1229, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1229
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    More about this item

    Keywords

    liquidity; market resiliency; high frequency trading; fragmentation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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