Liquidity Dynamics Across Small and Large Firms

by Tarun Chordia of Emory University,
Lakshmanan Shivakumar of the London Business School, and
Avanidhar Subrahmanyam of the University of California, Los Angeles

May 13, 2003

Abstract: In this paper, we analyze cross-sectional heterogeneity in the time-series variation of liquidity in equity markets. Our analysis uses a broad time-series and cross-section of liquidity data. We find that average daily changes in liquidity exhibit significant heterogeneity in the cross-section; the liquidity of small firms varies more on a daily basis than that of large firms. A steady increase in aggregate market liquidity over the past decade is more strongly manifest in large firms than in small firms. Absolute stock returns are an important determinant of liquidity. We investigate cross-sectional differences in the resilience of a firm's liquidity to information shocks. We use the sensitivity of stock liquidity to absolute stock returns as an inverse measure of this resilience, and find that the measure exhibits considerable cross-sectional variation. Firm size, return volatility, institutional holdings, and volume are all significant cross-sectional determinants of this measure.

Published in: Economic Notes, Vol. 33, No. 1, (February 2004), pp. 111-143.

Previously titled: The Cross-Section of Daily Variation in Liquidity

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