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RFS Advance Access published online on November 3, 2004
Review of Financial Studies, doi:10.1093/rfs/hhi010
Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved
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Original Articles

An Empirical Analysis of Stock and Bond Market Liquidity

Tarun Chordia 1, Asani Sarkar 2*, and Avanidhar Subrahmanyam 3
1 Goizueta Business School, Emory University
2 Federal Reserve Bank of New York
3 Anderson Graduate School of Management, University of California at Los Angeles

* To whom correspondence should be addressed.
Asani Sarkar, E-mail: sasni.sarkar{at}ny.frb.org


  Abstract

This paper 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. Also, money ows to government bond funds forecast bond market liquidity. The results establish a link between "macro" liquidity, or money ows, and "micro" or transactions liquidity.


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