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

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Author
Xu, Yongdeng
Taylor, Nick
Lu, Wenna
Date
2018-01-31Acceptance date
2018-01-27
Type
Article
acceptedVersion
Publisher
Elsevier
ISSN
1057-5219
Metadata
Show full item recordAbstract
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.
Journal/conference proceeding
International Review of Financial Analysis;
Citation
Xu, Y., Taylor, N. and Lu, W. (2018) 'Illiquidity and volatility spillover effects in equity markets during and after the global financial crisis: An MEM approach'. International Review of Financial Analysis, 56, pp.208-220.
Description
Article published in International Review of Financial Analysis, available at: https://doi.org/10.1016/j.irfa.2018.01.011.
Sponsorship
Cardiff Metropolitan University (Grant ID: Cardiff Metropolian (Internal))
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