Some Hypotheses on Commonality in Liquidity: New Evidence from the Chinese Stock Market

摘要

In this article, we examine four specific hypotheses relating to commonality in liquidity on the Chinese stock markets. These hypotheses are (1) that market-wide liquidity determines liquidity of individual stocks; (2) that liquidity varies with firm size; (3) that sectoral-based liquidity affects individual stock liquidities differently; and (4) that commonality in liquidity has an asymmetric effect. Drawing on a two-year data set on the Shanghai and Shenzhen stock exchanges comprising over 34 million and 48 million transactions, respectively, we find strong support for commonality in liquidity and a greater influence of industry-wide liquidity in explaining liquidity of individual stocks. Moreover, our results suggest that of the three main sectors-financial, industrial, and resources-the industrial sector's liquidity is most important in explaining individual stock liquidities. Finally, we do not find any evidence of size effects and document an asymmetric effect of market-wide liquidity on liquidity of individual stocks.