Uncovering the Time-varying Relationship between Commonality in Liquidity and Volatility


  • IREA Working Papers


  • This study examines the dynamic linkages between commonality in liquidity in international stock markets and market volatility. Using a recently proposed liquidity measure as input in a variance decomposition exercise, we show that innovations to liquidity in most markets are induced predominately by inter-market innovations. We also find that commonality in liquidity peaks immediately after large market downturns, coinciding with periods of crisis. The results from a dynamic Granger causality test indicate that the relationship between commonality in liquidity and market volatility is bi-directional and time-varying. We show that while volatility Granger-causes commonality in liquidity throughout the entire sample period, market volatility is enhanced by commonality in liquidity only in sub-periods. Our results are helpful for practitioners and policy makers.

fecha de publicación

  • 2019

Líneas de investigación

  • Financial Crisis
  • Granger Causality
  • Market Liquidity
  • Spillover Index
  • Systemic Liquidity
  • Variance


  • 201916