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Measuring liquidity commonality in financial markets

journal contribution
posted on 30.03.2020 by Chenlu Li, Baibing Li, Kai-Hong Tee
This paper contributes to the literature by developing a new methodology, termed as the beta index, for measuring liquidity commonality in financial markets, that is derived from the dynamics of liquidity co-movements. We show that computing the beta index is a straightforward process. In addition, not only is the proposed beta index more efficient in controlling for confounding factors and addressing the associated statistical inference issues, but also it will enhance the accuracy of estimation. We apply the beta index to track the liquidity commonality in the foreign exchange market over the study period and identify important financial and economic events that caused liquidity commonality. We detect periods of high and low liquidity commonalities that especially would benefit active market traders who frequently rebalance portfolios and require knowledge of liquidity commonality as an input to give an important early signal and implication on diversification benefit.

History

School

  • Business and Economics

Department

  • Business
  • Economics

Published in

Quantitative Finance

Volume

20

Issue

9

Pages

1553 - 1566

Publisher

Taylor & Francis (Routledge)

Version

AM (Accepted Manuscript)

Rights holder

© Informa UK Limited, trading as Taylor & Francis Group

Publisher statement

This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 20 April 2020, available online: http://www.tandfonline.com/10.1080/14697688.2020.1744698.

Acceptance date

13/03/2020

Publication date

2020-04-20

Copyright date

2020

ISSN

1469-7688

eISSN

1469-7696

Language

en

Depositor

Prof Baibing Li. Deposit date: 30 March 2020

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