Abstract
Anomalies and stock returns have been studied thoroughly in the realm of asset pricing. This work is motivated by the lack of such studies on liquidity co-variation patterns. Earlier research documents market-wide commonality in liquidity. However, empirical work on the temporal behaviour of this observed commonality across trading weekdays has surprisingly been nonexistent. Given the well documented inverted U-shaped pattern of trading activity across weekdays, and the negative relation between trading costs and volume, it is argued that commonality in liquidity should exhibit a U-shaped pattern across weekdays. The empirical evidence supports this hypothesis. In particular, liquidity co-variations were found to be significantly higher on Mondays and Fridays. The contention that liquidity co-variations exhibit a U-shaped pattern is undoubtedly of interest to portfolio managers, investors, egulators, and academics.
Notes
1 Since the market opens via a call auction, the opening batch trades usually differ from normal trades and may have different liquidity characteristics.
2 The market portfolio is defined to contain all the stocks in the market except the individual stock itself.
3 To ensure accuracy of the results, the top and bottom 1% of extreme observations are deleted.
4 The tests were also implemented on the dollar effective and the percentage effective spreads. The results are qualitatively similar.
5 The results for the different specifications of the model and for the error analysis are not reported for brevity. They are available upon request.