Illiquidity, return and risk in G7 stock markets: Interdependencies and spillovers

Trading activity in G7 stock markets reflects not only the macroeconomic and financial impact of these G7 economies in international economic growth, but also their financial interdependence. While this nexus of major stock markets has been explored in terms of volatility and return spillovers, ther...

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Bibliographic Details
Published in:International review of financial analysis 2014-10, Vol.35, p.118-127
Main Authors: Andrikopoulos, Andreas, Angelidis, Timotheos, Skintzi, Vasiliki
Format: Article
Language:English
Subjects:
G7 stock markets
Illiquidity spillovers
Industrialized nations
International finance
Liquidity
Portfolio diversification
Rates of return
Return spillovers
Securities markets
Securities regulations
Securities trading
Stock exchanges
Studies
VAR
Volatility spillovers
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Summary:Trading activity in G7 stock markets reflects not only the macroeconomic and financial impact of these G7 economies in international economic growth, but also their financial interdependence. While this nexus of major stock markets has been explored in terms of volatility and return spillovers, there has been no combined analysis of return, volatility and illiquidity spillovers. We study illiquidity spillovers because they are transmissions of trading activity and, thereof, transmissions of information and market sentiment. We find that the dynamics of international stock markets are characterized by persistent illiquidity and also that illiquidity shocks are significantly correlated across markets. Furthermore, we discover Granger causal associations between risk, return and illiquidity across G7 stock market and also within each stock market. Our findings bear significance for the regulation of international financial markets and also for international portfolio diversification. •We model the interaction between stock return, volatility and illiquidity.•Our sample consists of G7 stock markets, for the period 1991–2013.•We examine the effect of crises on risk, return and illiquidity spillovers.•We apply VAR and find a negative association between illiquidity and return.•We find cross-market spillover effects for illiquidity, return and volatility.
ISSN:1057-5219
1873-8079
DOI:10.1016/j.irfa.2014.07.013