Hostname: page-component-cd9895bd7-jkksz Total loading time: 0 Render date: 2024-12-26T15:21:50.470Z Has data issue: false hasContentIssue false
  • English
  • Français

Stock and Bond Market Liquidity: A Long-Run Empirical Analysis

Published online by Cambridge University Press:  01 February 2009

Ruslan Y. Goyenko  and
Andrey D. Ukhov
Ruslan Y. Goyenko
Affiliation:
Desautels Faculty of Management, McGill University, 1001 Sherbrooke St. West, Montreal, Quebec H3A 1G5, Canada. ruslan.goyenko@mcgill.ca
Andrey D. Ukhov
Affiliation:
Kellogg School of Management, Northwestern University, 2001 Sheridan Rd, Evanston, IL 60208. a-ukhov@kellogg.northwestern.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper establishes liquidity linkage between stock and Treasury bond markets. There is a lead-lag relationship between illiquidity of the two markets and bidirectional Granger causality. The effect of stock illiquidity on bond illiquidity is consistent with flight-to-quality or flight-to-liquidity episodes. Monetary policy impacts illiquidity. The evidence indicates that bond illiquidity acts as a channel through which monetary policy shocks are transferred into the stock market. These effects are observed across illiquidity of bonds of different maturities and are especially pronounced for illiquidity of short-term maturities. The paper provides evidence of illiquidity integration between stock and bond markets.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 189 - 212
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agnew, J., and Balduzzi, P.. “Rebalancing Activity in 401(k) Plans.” Working Paper, Boston College (2005).Google Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H.. “Asset Pricing and the Bid-Ask Spread.” Journal of Financial Economics, 17 (1986), 223–249.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H.. “The Effect of Beta, Bid-Ask Spread, Residual Risk, and Size on Stock Returns.” Journal of Finance, 44 (1989), 479–486.Google Scholar
Amihud, Y., and Mendelson, H.. “Liquidity, Maturity, and the Yields on U.S. Treasury Securities.” Journal of Finance, 46 (1991), 1411–1425.CrossRefGoogle Scholar
Balduzzi, P.; Elton, E.; and Green, T.. “Economic News and Bond Prices: Evidence from U.S. Treasury Market.” Journal of Financial and Quantitative Analysis, 36 (2001), 523–543.CrossRefGoogle Scholar
Beber, A.; Brandt, M.; and Kavajecz, K.. “Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market.” Review of Financial Studies, 22 (2009), 925–957.CrossRefGoogle Scholar
Benston, G., and Hagerman, R.. “Determinants of Bid-Ask Spreads in the Over-the-Counter Market.” Journal of Financial Economics, 1 (1974), 353–364.CrossRefGoogle Scholar
Bernanke, B., and Blinder, A.. “The Federal Funds Rate and the Channels of Monetary Transmission.” American Economic Review, 82 (1992), 901–921.Google Scholar
Boudoukh, J., and Whitelaw, R.. “Liquidity as a Choice Variable: A Lesson from Japanese Government Bond Market.” Review of Financial Studies, 6 (1993), 265–292.CrossRefGoogle Scholar
Brandt, M. W., and Kavajecz, K. A.. “Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve.” Journal of Finance, 59 (2004), 2623–2654.CrossRefGoogle Scholar
Brennan, M., and Subrahmanyam, A.. “Market Microstructure and Asset Pricing: On the Compensation for Illiquidity in Stock Returns.” Journal of Financial Economics, 41 (1996), 441–464.CrossRefGoogle Scholar
Chordia, T.; Sarkar, A.; and Subrahmanyam, A.. “An Empirical Analysis of Stock and Bond Market Liquidity.” Review of Financial Studies, 18 (2005), 85–129.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Commonality in Liquidity.” Journal of Financial Economics, 56 (2000), 3–28.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Market Liquidity and Trading Activity.” Journal of Finance, 56 (2001), 501–530.CrossRefGoogle Scholar
Eisfeldt, A. “Endogenous Liquidity in Asset Markets.” Journal of Finance, 59 (2004), 1–30.CrossRefGoogle Scholar
Fleming, J.; Kirby, C.; and Ostdiek, B.. “Information and Volatility Linkages in the Stock, Bond, and Money Markets.” Journal of Financial Economics, 49 (1998), 111–137.CrossRefGoogle Scholar
Fleming, M. “Measuring Treasury Market Liquidity.” Economic Policy Review, 9 (2003), 83–108.Google Scholar
Fleming, M., and Remolona, E.. “What Moves the Bond Market? ” Economic Policy Review, 3 (1997), 31–50.Google Scholar
Fleming, M., and Remolona, E.. “Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information.” Journal of Finance, 54 (1999), 1901–1915.CrossRefGoogle Scholar
Fox, S. “Assessing TAA Manager Performance.” Journal of Portfolio Management, 26 (1999), 40–49.CrossRefGoogle Scholar
Goetzmann, W., and Massa, M.. “Daily Momentum and Contrarian Behavior of Index Fund Investors.” Journal of Financial and Quantitative Analysis, 37 (2002), 375–389.CrossRefGoogle Scholar
Goldreich, D.; Hanke, B.; and Nath, P.. “The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market.” Review of Finance, 9 (2005), 1–32.CrossRefGoogle Scholar
Green, C. T. “Economic News and the Impact of Trading on Bond Prices.” Journal of Finance, 59 (2004), 1201–1234.CrossRefGoogle Scholar
Hasbrouck, J. “Trading Costs and Returns for U.S. Equities: The Evidence from Daily Data.” Working Paper, New York University (2006).Google Scholar
Hasbrouck, J., and Seppi, D.. “Common Factors in Prices, Order Flows, and Liquidity.” Journal of Financial Economics, 59 (2001), 383–411.CrossRefGoogle Scholar
Harvey, C., and Huang, R.. “The Impact of Federal Reserve Bank’s Open Market Operations.” Journal of Financial Markets, 5 (2002), 223–257.CrossRefGoogle Scholar
Ho, T., and Stoll, H.. “The Dynamics of Dealer Markets under Competition.” Journal of Finance, 38 (1983), 1053–1074.CrossRefGoogle Scholar
Huang, R.; Cai, J.; and Wang, X.. “Information-Based Trading in the Treasury Note Interdealer Broker Market.” Journal of Financial Intermediation, 11 (2002), 269–296.CrossRefGoogle Scholar
Huberman, G., and Halka, D.. “Systematic Liquidity.” Journal of Financial Research, 2 (2001), 161–178.CrossRefGoogle Scholar
Ingersoll, J. E. Jr. Theory of Financial Decision Making. Savage, MD: Rowman and Littlefield (1987).Google Scholar
Jones, C. “A Century of Stock Market Liquidity and Trading Costs.” Working Paper, Columbia University (2002).CrossRefGoogle Scholar
Kamara, A. “Liquidity, Taxes, and Short-Term Treasury Yields.” Journal of Financial and Quantitative Analysis, 29 (1994), 403–417.CrossRefGoogle Scholar
Krishnamurthy, A. “The Bond/Old-Bond Spread.” Journal of Financial Economics, 66 (2002), 463–506.CrossRefGoogle Scholar
Longstaff, F. A. “The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices.” Journal of Business, 77 (2004), 511–526.CrossRefGoogle Scholar
McQueen, G., and Roley, V.. “Stock Prices, News, and Business Conditions.” Review of Financial Studies, 6 (1993), 683–707.CrossRefGoogle Scholar
O’Hara, M., and Oldfield, G.. “The Microeconomics of Market Making.” Journal of Financial and Quantitative Analysis, 21 (1986), 361–376.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 113 (2003), 642–685.CrossRefGoogle Scholar
Patelis, A. “Stock Return Predictability and the Role of Monetary Policy.” Journal of Finance, 52 (1997), 1951–1972.CrossRefGoogle Scholar
Shiller, R. J. Market Volatility. Cambridge, MA: MIT Press (1989).Google Scholar
Shiller, R. J., and Perron, P.. “Testing the Random Walk Hypothesis: Power vs. Frequency of Observation.” Economics Letters, 18 (1985), 381–386.CrossRefGoogle Scholar
Strongin, S. “The Identification of Monetary Policy Disturbances: Explaining the Liquidity Puzzle.” Journal of Monetary Economics, 35 (1995), 463–497.CrossRefGoogle Scholar
Swensen, D. Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. New York, NY: Free Press (2000).Google Scholar
Thorbecke, W. “On the Stock Market Returns and Monetary Policy.” Journal of Finance, 52 (1997), 635–654.CrossRefGoogle Scholar
Warga, A. “Bond Return, Liquidity, and Missing Data.” Journal of Financial and Quantitative Analysis, 27 (1992), 605–617.CrossRefGoogle Scholar
Xiao, Z., and Phillips, P.. “Efficient Detrending in Cointegrating Regression.” Econometric Theory, 15 (1999), 519–548.CrossRefGoogle Scholar