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Essays on liquidity commonality in equity markets

Borghi, R. W. (2018). Essays on liquidity commonality in equity markets. (Unpublished Doctoral thesis, City, University of London)

Abstract

This thesis contributes to the emerging literature that investigates the drivers of liquidity commonality in equity markets. Our main contribution is three- fold. First, we propose a new method to estimate liquidity commonality in equity markets to explore both supply-side (funding liquidity of intermediaries) and demand-side (trading behaviour of investors) determinants of its dynamics. The empirical analysis uses weekly data on 1909 stocks from the US, Japan, the UK and Euro zone countries, from January 2000 to January 2017. Second, we propose high-frequency quoting (HFQ), an activity carried out by high-frequency traders (HFT), as a new supply-side explanation of high-frequency liquidity commonality. Using the upgrade of the London Stock Exchange (LSE) trading system as an exogenous shock, we find that an increase in HFQ leads to an increase in liquidity commonality. Furthermore, we analyse the intraday patterns in high-frequency liquidity provision in relation to other microstructure variables, using tick-by-tick data for the FTSE100 stocks listed on the LSE, from September 2010 to July 2011. Finally, motivated by the crucial role of factor models in our research, we propose a two-level factor model with time-varying loadings that captures financial, global and regional risk in stock returns. We use it to investigate the dynamics of systematic risk in a large portfolio of firms from 54 countries, from January 2006 to January 2016.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School
Cass Business School > Finance
Doctoral Theses
URI: http://openaccess.city.ac.uk/id/eprint/20551
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