Essays on the liquidity and price information

Abstract

This dissertation consists of three essays on liquidity. The first essay examines the Importance of the pricing capabilities of turnover based volatility on liquidity measure. The second essay investigates the time trend of institutional investor's size preference. The third essay explores the trading activity of mutual funds that can be affected to liquidity comovement. In the first essay, this paper measures the volatility of illiquidity by modifying the Amihud measure from turnover based. We show that the volatility of the turnover based Amihud measure indicates that the volatility of illiquidity is pricing stock returns. And that higher volatility of illiquidity requires investors to compensate for higher stock returns. It confirmed that the volatility of illiquidity can be properly measured by supplementing the problems in the existing measures and providing different information from the liquidity measures that are widely used. The second essay, we examine the role of institutional investors in financial market liquidity and how different groups of investors are affected by liquidity in accordance with institutional investors' investment strategies. The sensitivity to market liquidity is an indicator of systematic liquidity risk. We show that systematic liquidity, which we define as the sensitivity of the stock’s liquidity to market liquidity, has decreased significantly for small-cap firms but increased significantly for large-cap firms. In other words, increased systematic liquidity in the cross-section of firms can be explained by the time trend of institutional ownership. The third essay, we examine how trading activities according to the fund flow of mutual funds affect the liquidity sensitivity of individual stocks and the liquidity covary among stocks. We show that the impact of mutual fund trading on comovement in liquidity is due to correlated trading across mutual fund investors. In particular, the liquidity of pairs of stocks that are connected through their common active institutional trading covary more together.