Acknowledgments: We are grateful to Professors Bong-Chan Kho, Hee-Joon Ahn, Jay M. Chung, and Joon Chae for their helpful comments. This paper is based on a part of Yang’s PhD dissertation at Seoul National University.
Liquidity Commonality and its Causes: Evidence from the Korean Stock Market*
Version of Record online: 28 SEP 2010
© 2010 Korean Securities Association
Asia-Pacific Journal of Financial Studies
Volume 39, Issue 5, pages 626–658, October 2010
How to Cite
Choe, H. and Yang, C.-W. (2010), Liquidity Commonality and its Causes: Evidence from the Korean Stock Market. Asia-Pacific Journal of Financial Studies, 39: 626–658. doi: 10.1111/j.2041-6156.2010.01025.x
- Issue online: 28 SEP 2010
- Version of Record online: 28 SEP 2010
- Received 16 July 2008; Accepted 3 August 2010
- Liquidity commonality;
- Information asymmetry;
- Style-based trading;
- Investor sentiment
This paper investigates the causes of liquidity commonality. We consider information asymmetry, volatility, utilitarian trading interest, style-based trading, inventory cost, and investor sentiment as potential candidates. Our empirical analysis shows that greater information asymmetry causes higher liquidity commonality. The significant effect of the order imbalance beta supports our volatility hypothesis as a cause of liquidity commonality. Program trading and the KOSPI200 index dummy are positively related to liquidity commonality, which is consistent with the style-based trading hypothesis. Higher individual trading is associated with higher liquidity commonality, which means that investor sentiment operates in the Korean market. However, volume beta and return beta, as proxies for the utilitarian trading effect and the inventory cost, respectively, are insignificantly related to liquidity commonality.