Liquidity Commonality In China’s Financial Market

Liquidity commonality,also known as systematic liquidity or commonality in liquidity,refers to the co-movement of liquidity of many financial assets,and the impact on liquidity of single financial asset from a common or market liquidity factor.From the financial crisis events in recent years,it turned out that liquidity commonality is a nonnegligible factor for stock market volatilities and recent financial crisis.Systematic risks are from the co-movement of funding liquidity and market liquidity.Although China’s financial markets are still segmented to some extent,market liquidity and funding liquidity interact and impact each other through the transactions of financial institutions in the stock exchange market and inter-bank market.As a result,it is urgent to study the measurement,cause and transmission mechanism of liquidity commonality in financial markets,which can help market supervisors seize the characteristics of liquidity transmission and co-movement in the financial markets,can help policy makers design well-performed market mechanism to improve the liquidity conditions and promote the integration of the financial markets,and can help investors choose better time for investing,reducing transaction fee and increasing the efficiency of transaction management.This dissertation mainly studies the liquidity in stock market and the funding liquidity in the money market.With the topic on liquidity commonality,it focuses on market liquidity and funding liquidity,forming the analytic framework of theoretical base---index construction and measurement---market liquidity commonality---causes of liquidity co-movement---funding liquidity commonality---co-movement of market liquidity and funding liquidity.With a full survey on existing literatures,it tested the existence of liquidity commonality from both market and industrial levels,and analyzed the factors affecting liquidity commonality based on the principles of demand and supply.From the view of liquidity layering,it examined different forms of funding liquidity commonality in the inter-bank market.Using the multivariate DCC-GARCH model,it captured the transmission and co-movement of liquidity shocks between stock exchange market and inter-bank market under market segmentation.The main conclusions of this paper are as follows:(1)There exists evidence of market and industrial liquidity commonality in the stock market,and the industrial liquidity commonality is larger.The liquidity commonality is variated in different industries.Market liquidity commonality has the scale effect,while industrial liquidity commonality has the inverse scale effect.Market liquidity commonality has asymmetric effect and the long-term effect.(2)Based on the fund supply theory,short-term interest rate,default spreads and the earning rates of financial intermediation can affect the liquidity commonality to different extents.Two specific events,the monthly percentage change of security account numbers and the equity division reform,both have impacts on liquidity commonality.Based on the related-party transaction theory and the investors’ sentiment theory,demand-side factors,such as the ownership ratio of institutions and the number of IPOs,can better explain the cause of liquidity commonality.(3)The liquidity transmission between different financial institutions in inter-bank money market is synchronized but variated to some extent.In general,the liquidity transmission tunnels are unobstructed with liquidity co-movement,while shocks from relevant events create temporal liquidity layering.(4)DCC-GARCH model neatly simulated the market liquidity and funding liquidity commonality between stock exchange market and inter-bank market.In the liquidity commonality mechanism,leverage is another important tunnel that(de)leveraging forms the liquidity co-movement within the markets.Simulation on typical events further shows the characteristics of liquidity commonality.Compared to existing literature,the marginal contributions of this paper are as follows:(1)Based on the environmental and institutional characteristics of China’s security markets,extended the existing studies on liquidity commonality of China’s stock market.Based on the fund supply theory,in spite of choosing the short-term interest rate and commercial paper spreads as factors that affect the fund supply,as indirect financing plays an important role in China’s financial markets,two specific events,the participation rate of new investors and the equity division reform,are chosen to more closely examine how the earning rates of financial intermediation cause liquidity commonality through the fund supply chain;it is also creative to choose the ownership ratio of institutions and the number of IPOs in the A-share market as demand-side factors and empirically examine the unique Chinese supply and demand factors that affect liquidity commonality.(2)From the view of liquidity layering,it is a new framework to examine liquidity commonality with static and dynamic analysis on the funding liquidity co-movement for inter-bank deposits,inter-bank lending and repo market.It provides support for central bank’s layered interventions,precisely preventing the liquidity risks of important financial institutions.(3)From the view of market segmentation,it studies how money market transactions set up the transmission tunnel between financial institutions and stock traders to transmit liquidity shocks.In the transmission mechanism of funding liquidity---availability of investment and arbitrage funds---liquidity co-movement between stock exchange market and inter-bank market,and under the shadow bank system,leverage is another important tunnel to transmit liquidity,that(de)leveraging shapes the liquidity commonality within the markets,and through which fund restrictions will affect individual security transaction and lead to financial contagion.The “Flight to quality”phenomenon is also a factor.