Commonality in Returns, Liquidity, and Trading Volume around the World

We analyze commonality in liquidity in 40 countries around the world. Recent U.S. studies, e.g. Chordia, Roll, and Subramanyam (2000), Hasbrouck and Seppi (2001), and Huberman and Halka (2001), document commonality in liquidity in the U.S. equity market. Acharya and Pedersen (2005) show that commonality in liquidity constitutes a priced risk factor in U.S. asset returns. Virtually nothing is known, however, about the importance of this phenomenon in other markets. We use daily data on roughly 25,000 stocks from 40 countries to analyze the extent to which the liquidity and trading volume of individual securities move together. We employ the methodology of Morck, Yeung, and Yu (2000) to construct a monthly measure of commonality in returns, liquidity, and trading volume over the period 1995:01-2004:12. Our study uncovers interesting patterns in commonality in returns, liquidity, and trading volume, both in the time-series and cross-sectionally.

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Ingolf Dittmann

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