We examine the liquidity of 456 different cryptocurrencies, and show that return predictability diminishes in cryptocurrencies with high market liquidity. We show that whilst Bitcoin returns are ...showing signs of efficiency, numerous cryptocurrencies still exhibit signs of autocorrelation and non-independence. Our findings also show a strong relationship between the Hurst exponent and liquidity on a cross-sectional basis. Therefore, we conclude that liquidity plays a significant role in market efficiency and return predictability of new cryptocurrencies.
•We examine 456 cryptocurrencies.•Return predictability diminishes as liquidity increases in cryptocurrencies.•Volatility decreases as liquidity increases in cryptocurrencies.•There are no signs of an illiquidity premium.
Stock market liquidity is a crucial precondition for well-functioning financial markets, while monetary policy is an important determinant for Stock market liquidity. This paper examines the dynamic ...impact of monetary policy on stock market liquidity in the short, medium, and long run and the asymmetry of the impact in bull and bear markets. Time-varying parameter vector autoregressive model is applied to study the monetary policy and stock market liquidity of China over the period 1997–2018. The results show that the impact of monetary policy on stock market liquidity varies across time and markets. Expanding monetary policy can help replenish stock market liquidity only if stable liquidity expectations are established. Therefore, when the central bank intends to influence stock market liquidity by regulating funding liquidity, it first needs to strengthen the management of liquidity expectations to establish funding liquidity expectations and prevent the market from falling into a liquidity spiral.
In this paper, we provide a thorough study on the relevance of liquidity‐adjusted value‐at‐risk (LVaR) and expected shortfall (LES) forecasts. We measure additional liquidity of an asset via the ...difference between its respective bid and ask prices and we assess the non‐normality of bid–ask spreads, especially in turbulent market times. The empirical assessment comprises German stocks in both calm and turmoil market times, and our results provide evidence that liquidity risk turns out to be crucial for the quality of regulatory risk assessment in turmoil market times. We find that a Cornish–Fisher approximation describes a sensible choice for LVaR forecasts whereas an extreme value approach results in adequate LES forecasts.
Evaporating Liquidity Nagel, Stefan
The Review of financial studies,
07/2012, Volume:
25, Issue:
7
Journal Article
Peer reviewed
The returns of short-term reversal strategies in equity markets can be interpreted as a proxy for the returns from liquidity provision. Using this approach, this article shows that the return from ...liquidity provision is highly predictable with the VIX index. Expected returns and conditional Sharpe ratios from liquidity provision spike during periods of financial market turmoil. The results point to withdrawal of liquidity supply and an associated increase in the expected returns from liquidity provision, as a main driver behind the evaporation of liquidity during times of financial market turmoil, consistent with theories of liquidity provision by financially constrained intermediaries.
We investigate the cross-sectional determinants of corporate bond returns and find that downside risk is the strongest predictor of future bond returns. We also introduce common risk factors based on ...the prevalent risk characteristics of corporate bonds-downside risk, credit risk, and liquidity risk-and find that these novel bond factors have economically and statistically significant risk premiums that cannot be explained by long-established stock and bond market factors. We show that the newly proposed risk factors outperform all other models considered in the literature in explaining the returns of the industry- and size/maturity-sorted portfolios of corporate bonds.
Stock Market Declines and Liquidity HAMEED, ALLAUDEEN; KANG, WENJIN; VISWANATHAN, S.
The Journal of finance (New York),
February 2010, Volume:
65, Issue:
1
Journal Article
Peer reviewed
Consistent with recent theoretical models where binding capital constraints lead to sudden liquidity dry-ups, we find that negative market returns decrease stock liquidity, especially during times of ...tightness in the funding market. The asymmetric effect of changes in aggregate asset values on liquidity and commonality in liquidity cannot be fully explained by changes in demand for liquidity or volatility effects. We document interindustry spillover effects in liquidity, which are likely to arise from capital constraints in the market making sector. We also find economically significant returns to supplying liquidity following periods of large drops in market valuations.
Liquidity and leverage Adrian, Tobias; Shin, Hyun Song
Journal of financial intermediation,
07/2010, Volume:
19, Issue:
3
Journal Article
Peer reviewed
In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, and eliciting responses from financial intermediaries ...who adjust the size of their balance sheets. We document evidence that marked-to-market leverage is strongly procyclical. Such behavior has aggregate consequences. Changes in dealer repos – the primary margin of adjustment for the aggregate balance sheets of intermediaries – forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index VIX index. Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.
We develop bespoke rational bubble models for Bitcoin and cryptocurrencies that incorporate both heavy tails and the probability of a complete collapse in asset prices. Empirically, we present ...robustified evidence of bubbles in Bitcoin and Ethereum. Theoretically, we show that liquidity risks may generate heavy-tails in Bitcoin and cryptocurrency markets. Even in the absence of bubbles dramatic booms and busts can occur. We thus sound a timely note of caution.
•We develop bespoke rational bubble models for cryptocurrencies.•Liquidity risks generate heavy-tails in Bitcoin and other cryptocurrency markets.•Bubbles are not necessary to generate boom–bust patterns in cryptocurrencies.•Further, in the absence of central regulation, prices may completely collapse.•We present empirical evidence of bubbles in Bitcoin and Ethereum.
The present study assesses the causality of geopolitical risk (GPR), oil prices (OPs) and financial liquidity by means of wavelet analysis, which aims to investigate whether such relationships ...support the monetary equilibrium model in Saudi Arabia. Our findings indicate that OP and financial liquidity are related in the time domain when GPR is high. We detect both short- and medium-term correlations among OPs, financial liquidity and GPR in the frequency domain. Additionally, in the absence of GPR, we notice a mid-term correlation between OPs and financial liquidity in the time and frequency domains. Our results support the assumed monetary equilibrium model, which, in turn, is an indication of the fact that OPs are dependent on GPR and that financial liquidity relies on the OP. Such conclusions suggest that the country would benefit from adopting a resource income diversification policy to reduce its impact on OP fluctuations. Additionally, the diversion of unnecessary government expenditures to the investment programs would also represent a beneficial shift in action.
•Assess the causality of geopolitical risk (GPR), oil prices (OPs) and financial liquidity.•Investigate whether such relationships support the monetary equilibrium model in Saudi Arabia.•Both short- and medium-term correlations in the frequency domain.•Adopting a resource income diversification policy to reduce its impact on OP fluctuations.
•We construct the liquidity spillover network and use network centrality to measure liquidity connectedness.•There is a significantly negative relationship between liquidity connectedness and stock ...price crash risk.•Liquidity connectedness depresses stock price crash risk through two potential channels: increased conditional conservatism and decreased stock price synchronicity.•We examine the heterogeneity of the impact of liquidity connectedness on stock price crash risk among firms from three perspectives (external monitoring, risk-taking, the ownership type).
Using a sample of CSI300 over the 2006–2021 period to establish liquidity spillover networks, we find a significantly negative relationship between liquidity connectedness and stock price crash risk. Further analysis shows that liquidity connectedness depresses stock price crash risk through two potential channels: increased conditional conservatism and decreased stock price synchronicity. Moreover, this effect is more prominent for firms with effective external monitoring, firms with lower risk-taking, and state-owned enterprises (SOEs). Overall, our paper shows that liquidity connectedness is an important factor influencing crash risk and provides useful guidance for corporate management and investor decision-making.
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