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RFS Advance Access originally published online on November 3, 2004
Review of Financial Studies 2005 18(1):85-129; doi:10.1093/rfs/hhi010
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The Review of Financial Studies Vol. 18, No. 1 © 2005 The Society for Financial Studies; all rights reserved.

An Empirical Analysis of Stock and Bond Market Liquidity

Tarun Chordia
Emory University

Asani Sarkar
Federal Reserve Bank of New York

Avanidhar Subrahmanyam
University of California at Los Angeles

Address correspondence to: Asani Sarkar, The Federal Reserve Bank of New York, New York, NY 10045, or e-mail: asani.sarkar{at}ny.frb.org.

This article explores cross-market liquidity dynamics by estimating a vector autoregressive model for liquidity (bid-ask spread and depth, returns, volatility, and order flow in the stock and Treasury bond markets). Innovations to stock and bond market liquidity and volatility are significantly correlated, implying that common factors drive liquidity and volatility in these markets. Volatility shocks are informative in predicting shifts in liquidity. During crisis periods, monetary expansions are associated with increased liquidity. Moreover, money flows to government bond funds forecast bond market liquidity. The results establish a link between "macro" liquidity, or money flows, and "micro" or transactions liquidity.


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