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Nonlinear relationship between money market rate and stock market liquidity in China: A multifractal analysis.

ABSTRACT: This paper employs the multifractal detrended cross-correlation analysis (MF-DCCA) model to estimate the nonlinear relationship between the money market rate and stock market liquidity in China from a multifractal perspective, leading to a better understanding of the complexity in the relationship between the interest rate and stock market liquidity. The empirical results show that the cross-correlations between the money market rate and stock market liquidity present antipersistence in the long run and that they tend to be positively persistent in the short run. The negative cross-correlations between the interest rate and stock market liquidity are more significant than the positive cross-correlations. Furthermore, the cross-correlations between the money market rate and stock market liquidity display multifractal characteristics, explaining the variations in the relationship between the interest rate and stock market liquidity at different time scales. In addition, the lower degree of multifractality in the cross-correlations between the money market rate and stock market liquidity confirms that it is effective for the interest rate to control stock market liquidity. The Chinese stock market liquidity is more sensitive to fluctuations in the money market rate in the short term and is inelastic in response to the money market rate in the long term. In particular, the positive cross-correlations between the money market rate and stock market liquidity in the short run become strong in periods of crises and emergencies. All the evidence proves that the interest rate policy is an emergency response rather than an effective response to mounting concerns regarding the economic impact of unexpected exogenous emergencies and that the interest rate cut policy will not be as effective as expected.

SUBMITTER: Sun Y

PROVIDER: S-EPMC8051788 | biostudies-literature |

REPOSITORIES: biostudies-literature

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Project description:Market liquidity ensures the marketability of security and is an indispensable feature of stock markets. Previous studies have emphasized the role of stock market liquidity in empirical finance. However, they have inadequately explored its multidimensional nature. This study eliminates the ambiguities related to market liquidity by precisely measuring it by using popular and proven liquidity measures. As such, the present study aims to evaluate market liquidity in terms of depth, breadth, tightness, and immediacy in the Indian equity market and also identifies crucial interdependencies between liquidity dimensions. The study selects 500 stocks constituting the NIFTY 500 index of the National Stock Exchange, India, as of 26th May 2019. The data on trading volume, bid price, ask price, the number of shares outstanding, closing share prices were retrieved for the period from 1st April 2009 to 31st March 2019. The study employs Share Turnover, Amihud Illiquidity Ratio, Relative Quoted Spreads, and Coefficient of Elasticity of Trading for liquidity measurement. The Vector Auto-Regressive (VAR) model is used to establish the simultaneous relationships between liquidity dimensions. The analysis is conducted at the aggregate market level as well as across turnover based stock groups divided based on their rankings in terms of stock specific share turnover. The empirical results evidenced the presence of consistent depth, strong breadth, and immediacy but lower tightness in the Indian equity market. The market depth and tightness appear to be relevant in determining dimensional interdependencies. Also, less frequently traded stocks exhibit higher illiquidity in the wake of lower tightness. The findings of this study will assist the investors to wisely understand the multifaceted nature of market liquidity and base their trading decisions accordingly. Moreover, the regulators of the stock exchange can devise liquidity enhancing policies based on the directional movements among liquidity dimensions.

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Nonlinear relationship between money market rate and stock market liquidity in China: A multifractal analysis.

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