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The joint dynamics of liquidity, returns, and volatility across small and large firms

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This paper explores liquidity spillovers in market-capitalization-based portfolios of NYSE stocks. Return, volatility, and liquidity dynamics across the small- and large-cap sectors are modeled by way of a vector autoregression model, using data that spans more than 3,000 trading days. We find that volatility and liquidity innovations in one sector are informative in predicting liquidity shifts in the other. Impulse responses indicate the existence of persistent liquidity, return, and volatility spillovers across the small- and large-cap sectors. Lead and lag patterns across small- and large-cap stocks are stronger when spreads in the large-cap sector are wider. Consistent with the notion that private informational trading in large-cap stocks is transmitted to other stocks with a lag, order flows in the large-cap-stock decile predict both transaction-price-based and mid-quote returns of small-cap deciles when large-cap spreads are high.

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  • Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2005. "The joint dynamics of liquidity, returns, and volatility across small and large firms," Staff Reports 207, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:207
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    Cited by:

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    2. Suraj Kumar & Krishna Prasanna, 2019. "Global Financial Crisis: Dynamics of Liquidity Risk in Emerging Asia," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(3), pages 339-362, December.
    3. Będowska-Sójka, Barbara & Kliber, Agata, 2019. "The causality between liquidity and volatility in the Polish stock market," Finance Research Letters, Elsevier, vol. 30(C), pages 110-115.
    4. Hvozdyk, Lyudmyla & Rustanov, Serik, 2016. "The effect of financial transaction tax on market liquidity and volatility: An Italian perspective," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 62-78.
    5. Kriti Kulshrestha & Saumitra N. Bhaduri, 2019. "The Joint Dynamics of Liquidity and Volatility Across Small- and Large- index Indian Funds," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(2_suppl), pages 167-182, August.
    6. Apergis, Nicholas & Lau, Chi Keung & Xu, Bing, 2023. "The impact of COVID-19 on stock market liquidity: Fresh evidence on listed Chinese firms," International Review of Financial Analysis, Elsevier, vol. 90(C).
    7. Prince Dubois HIKOUATCHA KENFACK, 2018. "the determinants of Illiquidity on emerging stock markets:," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 9(2), pages 2-19, December.
    8. Maran, Raluca, 2022. "Improving MSMEs’ access to start-up financing in ASEAN countries," MPRA Paper 114501, University Library of Munich, Germany.
    9. Mousumi Bhattacharya & Sharad Nath Bhattacharya & Sumit Kumar Jha, 2022. "Does time-varying illiquidity matter for the Indian stock market? Evidence from high-frequency data," Australian Journal of Management, Australian School of Business, vol. 47(2), pages 251-272, May.
    10. Lilian de Menezes & Marianna Russo & Giovanni Urga, 2016. "Identifying Drivers of Liquidity in the NBP Month-ahead Market," EcoMod2016 9570, EcoMod.
    11. Keunkwan Ryu & Hyun-yeol Shin, 2010. "Liquidity as Price Effect on Time to Sale," Korean Economic Review, Korean Economic Association, vol. 26, pages 307-340.

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    Keywords

    Liquidity (Economics); Rate of return; Securities; Stocks;
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