Emerging Market Liquidity and Crises
Whereas conventional wisdom argues that markets shut down during crises, with sellers struggling to find buyers, we find that markets continue to operate during financial turmoil, even in narrow and volatile emerging economies. Simple event studies...
| Main Authors: | , , |
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| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2007/12/8881183/emerging-market-liquidity-crises http://hdl.handle.net/10986/7549 |
| Summary: | Whereas conventional wisdom argues that
markets shut down during crises, with sellers struggling to
find buyers, we find that markets continue to operate during
financial turmoil, even in narrow and volatile emerging
economies. Simple event studies indicate that both trading
volume and trading costs increase in crisis times. Prices
change more with each dollar transacted (pushing the Amihud
illiquidity measure up) and bid-ask spreads widen. More
generally, econometric estimates show that large price
downturns, typical of crises, are associated with higher
trading activity and increased trading costs, with trading
activity declining only later as crises progress. Thus,
while trading activity tends to be negatively related to
trading costs during tranquil times (and across securities),
this relation appears to break down during crises. These
results are consistent with the analytical literature on
portfolio rebalancing by heterogeneous agents in times of crises. |
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