Research On Commonality In Liquidity Of China’s Stock Market

Commonality in liquidity refers to the trend of changes in the liquidity of different stocks in the same direction.It is specifically manifested as the synchronicity of changes in the liquidity of individual stocks and the liquidity of a specific asset portfolio.When this asset portfolio refers to the whole market,the existence of commonality in liquidity means that the liquidity of individual stocks can be at least partially explained by the liquidity of the market.The liquidity risk of the market cannot be diversified,thus the risk of which can be explained by the liquidity of the whole market cannot be dispersed by constructing asset portfolios.Therefore,the commonality in liquidity is a non-dispersible systemic risk,which is also regarded as a pricing factor of stocks.The liquidity of stocks reflects the difficulty and cost of realizing stocks.Due to the commonality in liquidity,when the liquidity of the market deteriorates,the liquidity of individual stocks will deteriorate and even lead to the exhaustion of liquidity.The difficulty of realizing stocks and the cost of realizing stocks have been increased,which ultimately led to an accelerated decline in stock prices and liquidity.The study on the commonality in liquidity began with the research results of Chordia et al.(2000).They observed that the liquidity of different stocks have the same trend of movement,and found that the changes in the liquidity of individual stocks can be largely explained by changes in market liquidity.Karolyi et al.(2012)examined the commonality in liquidity from40 countries in the global stock market and found that the commonality in liquidity in China stock market is much higher than that in other countries.In reality,China stock market fluctuates violently,and prices of stocks rise and fall at the same time.The phenomenon of commonality in liquidity is very serious.For example,in October 2007 and June 2015,the Ashare market fell sharply,and the spectacle of 1,000-share limit down and 1,000-share suspension appeared.The liquidity of almost all stocks tended to be exhausted,which brought huge losses to stock investors.Liquidity risk is the extreme manifestation of the commonality in liquidity in our country’s stock market.The commonality of liquidity is worth to be attentioned for all market participants.Investors are concerned about risks and returns.As a non-dispersible systemic risk,commonality of liquidity may increase the difficulty as well as cost of stock realization,especially when the liquidity of the market starts to shrink.In tight times,the existence of commonality of liquidity will worsen the liquidity of stocks and bring huge losses to investors.For financial institutions,they will influence the commonality of liquidity through liquidity supply(Comerton-Forde et al.,2010)and related transactions(Coughenour and Saad,2004),thereby amplifying or reducing market risks.In addition,regulators have to maintain a fair market order,protect the legitimate rights and interests of investors,prevent and resolve major risks in the capital market,help to establish and improve a multi-level capital market system,and provide multi-channel equity financing for innovative companies of different types and stages.Therefore,from the supervisory level,the identification,management and prevention of risks in the synchronization of stock liquidity also have very important practical significance.This paper studies the characteristics and causes of the commonality of liquidity in China stock market,and focuses on the causes of formation from the supply side and demand side.The main research results of this paper are as follows.1.This paper supplies research on the characteristics of the commonality of liquidity in China’s A-share stock market.Relying on the existing research methods,by constructing different indicators of the commonality of liquidity,the size effect,value effect,industry effect of the commonality of liquidity,and the relationship with stock price synchronization are studied.In the research on the characteristics of the commonality of liquidity,it is found that in China’s stock market,the commonality of liquidity has the characteristics of size effect,value effect,industry effect and is positive correlation with stock price synchronization.The size effect means that the higher the market value,the smaller the commonality of liquidity is.Further research on the characteristics of size effect also found that the stocks of high market value companies will have higher commonality of liquidity,while the commonality of liquidity between low market value stocks and high market value stocks will be lower.The value effect characteristic means that the higher the book-to-market ratio of a listed company,the higher the commonality of liquidity.The characteristics of the industry effect are that the commonality of liquidity of stocks is affected by the industry,and the commonality of liquidity of stocks in different industries are different.In addition,the commonality of liquidity has a positive correlation to the commonality of stock prices.2.From the perspective of the supply side,this paper examines the influence of capital constraints on the commonality of stock liquidity.In the existing research,the research on the supply-side factors focuses on the financing constraints of financial institutions,ignoring the financial constraints of individual investors.Frist of all,this article examines the impact of capital constraints on the commonality of liquidity by constructing a comprehensive index of market capital constraints that can contain both institutional and individual investor capital constraints information.The empirical findings show that the stronger the stock market capital constraints,the greater the commonality of liquidity is.Then,from the aspects of "herding behavior" and "flying to liquidity",the influence channels of capital constraints on the commonality of stock liquidity are examined,and the empirical results support the the "flying to liquidity" channel.Finally,in further research,it is found that compared with the bull market period,the financial constraints have a greater impact on the commonality of liquidity during the bear market;the greater the degree of information asymmetry of listed companies,the greater the impact of financial constraints on the commonality of liquidity is;the liquidity commonality of stocks with a high fund holding ratio is less affected by capital constraints;the liquidity commonality of stocks with lottery properties is more affected by capital constraints.3.From the demand side perspective,this paper examines the influence of investors’ sentiment on the commonality of stock liquidity.Chinese stock market started late,its development is relatively immature,and the lack of professionalism of investors makes great fluctuations of market sentiment.Studying the influence of investor sentiment on the commonality of stock liquidity helps us understand the cause of commonality of liquidity from the demand-side perspective.The study found that the higher the investor sentiment,the smaller the commonality of stock liquidity is.Further research also found that the stronger the nature of the stock lottery,the greater the influence of investor sentiment on commonality of liquidity;the company with a high proportion of fund holdings has less influence on commonality of stock liquidity by investor sentiment;company with better profitability,the commonality of liquidity is less affected by investor sentiment.4.From the demand side perspective,this paper examines the influence of ETFs on stocks’ liquidity and commonality of liquidity.It is found that the higher the proportion of ETFs’ holdings,the better the liquidity of the constituent stocks,but the higher the commonality of liquidity.By examining the impact of different types of ETFs on stock liquidity and commonality of liquidity.It is found that the holdings of the Shenzhen Stock Exchange’s crossmarket ETFs have no positive impact on stock liquidity and commonality of liquidity,while other types of ETFs(Shanghai Stock Exchange cross-market ETFs,single-market ETFs)have a positive effect on stock liquidity and commonality of liquidity.The results show that the intraday trading mechanism is the reason why ETFs provide liquidity to the stock market and improve the commonality of stock liquidity.The academic significances of this paper are as follows:1.In the research on the characteristics of the commonality of stock liquidity,it found the value effect characteristics;in the research on the size effect,new manifestations of thesize effect are discovered;it is found that the commonality of stock liquidity is consistent with the commonality of stock prices.In addition,the research on pricing role of the existence of commonality of liquidity has been supplemented,and the commonality of liquidity is measured by various methods to make the research results more reliable.2.Existing studies agree that according to the "flying to liquidity" theory,the commonality of liquidity is consistent with liquidity,which means that the deterioration of liquidity is accompanied by the increase of commonality of liquidity.The intraday trading mechanism causes the ETFs to provide liquidity for the stocks and at the same time increases the commonality of liquidity.3.The existing literature on the supply-side factors of stocks’ commonality of liquidity focuses on the financing constraints of financial institutions,but ignoring the capital supply of individual investors.By constructing a comprehensive index of capital constraints that can reflect both institutional and individual investors in China’s stock market,this paper investigated the impact of capital constraints on the commonality of liquidity in my country’s stock market,and the result supports the influence channel of "flying to liquidity".4.From the supply side and the demand side,study the causes of commonality of liquidity.When investigating the influence of capital constraints and investor sentiment on the commonality of liquidity,this paper also made further studies on the influence of market and company characteristics,enriching the research on the causes of stocks’ commonality of liquidity.