Abstract
In this article we develop a long-run systematic liquidity measure by augmenting the standard model with a lagged dependent variable. Our empirical application involves a large sample of Australian equities and we find pervasive evidence of long-run commonality in liquidity. We also find evidence of a mean reversion tendency for time-varying liquidity beta. This result implies that the liquidity movement in the stock market maybe more influenced by noise traders’ activity rather than informed traders' activity.
Notes
1 Other papers in this literature include: Huberman and Halka (Citation2001); Hasbrouck and Seppi (Citation2001); Fernando (Citation2003); Domowitz et al. (Citation2005); Pascual et al. (Citation2004) and Acharya and Pedersen (Citation2005).
2 Stocks which are split or pay stock dividends are also excluded, as the transactions which are executed at the opening and closing call auction, or after hours or with special settlement conditions.
3 With some straightforward algebra, it can be shown that the inclusion of the lagged dependent variable in the model effectively imposes an infinite geometric lag structure on the market liquidity factor.