Common determinants of bond and stock market liquidity: the impact of financial crises, monetary policy, and mutual fund flows

Tarun Chordia, Asani Sarkar and Avanidhar Subrahmanyam

No 141, Staff Reports from Federal Reserve Bank of New York

Abstract: We study common determinants of daily bid-ask spreads and trading volume for the bond and stock markets over the 1991-98 period. We find that spread changes in one market are affected by lagged spread and volume changes in both markets. Further, spread and volume changes are predictable to a considerable degree using lagged market returns, lagged interest rates, lagged spreads, and lagged volume. During periods of financial crisis, stock and bond spreads and volume are more volatile and become more highly correlated; moreover, at these times, money supply positively affects financial market liquidity, albeit with a lag of two weeks. During normal times, increases in mutual fund flows enhance stock market liquidity and trading volume, but during financial crises, U.S. government bond funds see higher inflows, resulting in increased bond market liquidity. Overall, this study deepens our understanding of the dynamics of liquidity in financial markets and suggests how asset allocation strategies might be designed to reduce trading costs.

Keywords: Financial crises; Economic indicators; Financial markets (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-fmk and nep-ifn
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr141.pdf (application/pdf)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr141.html (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:141

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().