COVID-19 and Stock Market Liquidity: An Analysis of Emerging and Developed Markets
Keywords:COVID-19, liquidity, illiquidity, volatility, stock returns
Using a panel of indices for five developed market and five emerging markets for the period from 31 December 2019 to 19 June 2020, the relationship between stock market liquidity and COVID-19 pandemic is examined. The study is the first to interrogate nexus using three measures of liquidity, the percentage spread, market depth and Amihud’s (2002) ILLIQ measure. The pandemic is a global health condition with financial market implications, the results indicate that, stock market liquidity improved as we found a negative and significant relationship between illiquidity and COVID-19 across all the liquidity measures in all markets. However, improvements in stock market liquidity were more prevalent in developed markets relative to emerging markets. The results show that volatility negatively affected liquidity when illiquidity was measured by spread. Future research should focus on the impact of quantitative easing on stock markets liquidity during market turmoil.JEL Codes - G120; G150; G010
Acemoglu, D., Carvalho, V. M., Ozdaglar, A., and Tahbaz-Salehi, A., 2012. The network origins of aggregate fluctuations. Econometrica, 80(5), 1977-2016. http://dx.doi.org/10.3982/ECTA9623
Acemoglu, D., Ozdaglar, A., and Tahbaz-Salehi, A., 2017. Microeconomic origins of macroeconomic tail risks. The American Economic Review, 107(1), 54-108. http://dx.doi.org/10.1257/aer.20151086
Ahn, H. J., Bae, K. H., and Chan, K., 2001. Limit orders, depth, and volatility: Evidence from the stock exchange of Hong Kong. The Journal of Finance, 56(2), 767-788. http://dx.doi.org/10.1111/0022-1082.00345
Al-Awadhi, A. M., Alsaifi, K., Al-Awadhi, A., and Alhammadi, S., 2020. Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance, 27, 100326. http://dx.doi.org/10.1016/j.jbef.2020.100326
Amihud, Y., 2002. Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets, 5(1), 31-56. http://dx.doi.org/10.1016/S1386-4181(01)00024-6
Amihud, Y., and Mendelson, H., 1986. Liquidity and stock returns. Financial Analysts Journal, 42(3), 43-48. http://dx.doi.org/10.2469/faj.v42.n3.43
Bai, J., Krishnamurthy, A., and Weymuller, C. H., 2018. Measuring liquidity mismatch in the banking sector. The Journal of Finance, 73(1), 51-93. http://dx.doi.org/10.1111/jofi.12591
Baig, A. S., Butt, H. A., Haroon, O., and Rizvi, S. A. R., 2021. Deaths, panic, lockdowns and US equity markets: The case of COVID-19 pandemic. Finance Research Letters, 38, 101701. http://dx.doi.org/10.1016/j.frl.2020.101701
Bekaert, G., and Harvey, C. R., 2017. Emerging equity markets in a globalizing world. SSRN, 2344817. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2344817. http://dx.doi.org/10.2139/ssrn.2344817
Berkman, H., and Nguyen, N. H., 2010. Domestic liquidity and cross-listing in the United States. Journal of Banking & Finance, 34(6), 1139-1151. http://dx.doi.org/10.1016/j.jbankfin.2009.11.011
Bloom, N., 2009. The impact of uncertainty shocks. Econometrica, 77(3), 623-685. http://dx.doi.org/10.3982/ECTA6248
Brockman, P., and Chung, D. Y., 1999. Bid-ask spread components in an order-driven environment. Journal of Financial Research, 22(2), 227-246. http://dx.doi.org/10.1111/j.1475-6803.1999.tb00724.x
Brunnermeier, M. K., and Pedersen, L. H., 2009. Market liquidity and funding liquidity. Review of Financial Studies, 22(6), 2201-2238. http://dx.doi.org/10.1093/rfs/hhn098
Capponi, F., Cont, R., and Sani, A., 2019. Trade duration, volatility and market impact. Volatility and Market. Volatility and Market. http://dx.doi.org/10.2139/ssrn.3351736
Cecchetti, S. G., and Disyatat, P., 2010. Central bank tools and liquidity shortages: Federal Reserve Bank of New York.
Cheng, J., Powell, T., Skidmore, D., and Wessel, D., 2020. What’s the Fed doing in response to the COVID-19 crisis? What more could it do? , from https://www.brookings.edu/research/fed-response-to-covid19/
Chiu, J., Chung, H., Ho, K. Y., and Wang, G. H., 2012. Funding liquidity and equity liquidity in the subprime crisis period: Evidence from the ETF market. Journal of Banking & Finance, 36(9), 2660-2671. http://dx.doi.org/10.1016/j.jbankfin.2012.06.003
Diamond, D. W., and Rajan, R. G., 2001. Liquidity risk, liquidity creation, and financial fragility: A theory of banking. Journal of Political Economy, 109(2), 287-327. http://dx.doi.org/10.1086/319552
Ding, W., Levine, R., Lin, C., and Xie, W., 2020. Corporate immunity to the COVID-19 pandemic National Bureau of Economic Research, w27055.
Ederington, L. H., and Lee, J. H., 1996. The creation and resolution of market uncertainty: The impact of information releases on implied volatility. Journal of Financial and Quantitative Analysis, 31(4), 513-539. http://dx.doi.org/10.2307/2331358
Giroud, X., and Mueller, H. M., 2017. Firm leverage, consumer demand, and employment losses during the Great Recession. The Quarterly Journal of Economics, 132(1), 271-316. http://dx.doi.org/10.1093/qje/qjw035
Glosten, L. R., and Milgrom, P. R., 1985. Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. Journal of Financial Economics, 14(1), 71-100. http://dx.doi.org/10.1016/0304-405X(85)90044-3
Hasbrouck, J., 1988. Trades, quotes, inventories, and information. Journal of Financial Economics, 22(2), 229-252. http://dx.doi.org/10.1016/0304-405X(88)90070-0
Ibikunle, G., and Rzayev, K., 2020. Volatility, dark trading and market quality: evidence from the 2020 COVID-19 pandemic-driven market volatility. SSRN. http://dx.doi.org/10.2139/ssrn.3586410
International Monetary Fund, 2020a. COVID-19 Crisis Poses Threat to Financial Stability. from https://blogs.imf.org/2020/04/14/covid-19-crisis-poses-threat-to-financial-stability/
International Monetary Fund, 2020b. Policy Response to COVID-19. from https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#S
Kahle, K. M., and Stulz, R. M., 2013. Access to capital, investment, and the financial crisis. Journal of Financial Economics, 110(2), 280-299. http://dx.doi.org/10.1016/j.jfineco.2013.02.014
Kang, W., and Zhang, H., 2014. Measuring liquidity in emerging markets. Pacific-Basin Finance Journal, 27, 49-71. http://dx.doi.org/10.1016/j.pacfin.2014.02.001
Long, J. B., and Plosser, C. I., 1983. Real business cycles. Journal of Political Economy, 91(1), 39-69. http://dx.doi.org/10.1086/261128
Lou, X., and Shu, T., 2017. Price impact or trading volume: Why is the Amihud (2002) measure priced? Review of Financial Studies, 30(12), 4481-4520. http://dx.doi.org/10.1093/rfs/hhx072
Marozva, G., 2020. Stock Market Liquidity and Monetary Policy. International Journal of Economics & Business Administration, 8(2), 265-275. http://dx.doi.org/10.35808/ijeba/459
Marozva, G., and Makina, D., 2020. Liquidity risk and asset liability mismatches: Evidence from South Africa. Studies in Economics and Econometrics, 44(1), 73-112. http://dx.doi.org/10.1080/10800379.2020.12097357
Pastor, L., and Veronesi, P., 2012. Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219-1264. http://dx.doi.org/10.1111/j.1540-6261.2012.01746.x
Pinkowitz, L., Stulz, R. M., and Williamson, R., 2016. Do US firms hold more cash than foreign firms do? Review of Financial Studies, 29(2), 309-348. http://dx.doi.org/10.1093/rfs/hhv064
Reinhart, C. M., and Rogoff, K. S., 2009. This time is different: Eight centuries of financial folly: Princeton University Press.
Stoll, H. R., 2000. Presidential address: Friction. The Journal of Finance, 55(4), 1479-1514. http://dx.doi.org/10.1111/0022-1082.00259
Tetlock, P. C., 2007. Giving Content to Investor Sentiment: The Role of Media in the Stock Market. The Journal of Finance, 62(3), 1139-1168. http://dx.doi.org/10.1111/j.1540-6261.2007.01232.x
World Health Organisation, 2020. New WHO estimates: Up to 190 000 people could die of COVID-19 in Africa if not controlled from https://www.afro.who.int/news/new-who-estimates-190-000-people-could-die-covid-19-africa-if-not-controlled
Zhang, D., Hu, M., and Ji, Q., 2020. Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36, 101528. http://dx.doi.org/10.1016/j.frl.2020.101528
Zhu, H., 2014. Do dark pools harm price discovery? The Review of Financial Studies, 27, 747-789.
How to Cite
Copyright (c) 2021 SCIENTIFIC ANNALS OF ECONOMICS AND BUSINESS
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
All accepted papers are published on an Open Access basis.
The Open Access License is based on the Creative Commons license.
The non-commercial use of the article will be governed by the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License as currently displayed on https://creativecommons.org/licenses/by-nc-nd/4.0
Under the Creative Commons Attribution-NonCommercial-NoDerivatives license, the author(s) and users are free to share (copy, distribute and transmit the contribution) under the following conditions:
1. they must attribute the contribution in the manner specified by the author or licensor,
2. they may not use this contribution for commercial purposes,
3. they may not alter, transform, or build upon this work.