The effect of financial crises on stock market liquidity across global markets


Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

In this study, using a widely available market liquidity measure, the “turnover ratio”, the authors test for market liquidity contagion during the four financial crises that occurred between 1997 and 1999: The Thai crisis, the Hong Kong crisis, the Russian crisis, and the Brazilian crisis. It is found that while the liquidity levels decreased in approximately half of the sample markets, in the remaining half, the liquidity levels actually improved. The Granger causality tests show that while there is almost no evidence of causality (in both directions) before each crisis, during each crisis, approximately half of the pairwise tests were significant. The results show that most of these causalities are reverse feedback effects from the non-crisis-origin markets to the crisis-origin market. Therefore, it is concluded that the more crucial phenomenon during these crises is the “reverse feedback effects” rather than the liquidity contagion itself.

view full abstract hide full abstract
    • Table 1. Summary statistics
    • Table 2. Liquidity contagion after the Thai crisis
    • Table 3. Liquidity contagion after the Hong Kong crisis
    • Table 4. Liquidity contagion after the Russian crisis
    • Table 5. Liquidity contagion after the Brazilian crisis