Illiquidity and volatility spillover effects in equity markets during and after the global financial crisis: an MEM approach

Yongdeng Xu*, Nick Taylor, Wenna Lu

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

4 Citations (Scopus)
184 Downloads (Pure)

Abstract

Even though the volatility spillover effects in global equity markets have been documented extensively, the transmission of illiquidity across national borders has not. In this paper, we propose a multiplicative error model (MEM) for the dynamics of illiquidity. We empirically study the illiquidity and volatility spillover effects in eight developed equity markets during and after the recent financial crisis. We find that equity markets are interdependent, both in terms of volatility and illiquidity. Most markets show an increase in volatility and illiquidity spillover effects during the crisis. Furthermore, we find volatility and illiquidity transmission are highly relevant. Illiquidity is a more important channel than volatility in propagating the shocks in equity markets. Our results show an overall crucial role for illiquidity in US markets in influencing other equity markets' illiquidity and volatility. These findings are of importance for policy makers as well as institutional and private investors.

Original languageEnglish
Pages (from-to)208-220
Number of pages13
JournalInternational Review of Financial Analysis
Volume56
Early online date31 Jan 2018
DOIs
Publication statusPublished - 1 Mar 2018

Structured keywords

  • AF Financial Markets

Keywords

  • Illiquidity spillover
  • Volatility spillover
  • Multiplicative error model

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