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Stock and Bond Market Liquidity: A Long-Run Empirical Analysis

Published online by Cambridge University Press:  01 February 2009

Ruslan Y. Goyenko  and
Andrey D. Ukhov
Ruslan Y. Goyenko
Affiliation:
Desautels Faculty of Management, McGill University, 1001 Sherbrooke St. West, Montreal, Quebec H3A 1G5, Canada. ruslan.goyenko@mcgill.ca
Andrey D. Ukhov
Affiliation:
Kellogg School of Management, Northwestern University, 2001 Sheridan Rd, Evanston, IL 60208. a-ukhov@kellogg.northwestern.edu
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Abstract

This paper establishes liquidity linkage between stock and Treasury bond markets. There is a lead-lag relationship between illiquidity of the two markets and bidirectional Granger causality. The effect of stock illiquidity on bond illiquidity is consistent with flight-to-quality or flight-to-liquidity episodes. Monetary policy impacts illiquidity. The evidence indicates that bond illiquidity acts as a channel through which monetary policy shocks are transferred into the stock market. These effects are observed across illiquidity of bonds of different maturities and are especially pronounced for illiquidity of short-term maturities. The paper provides evidence of illiquidity integration between stock and bond markets.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 189 - 212
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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