, Amy Kwan
, Richard Philip
and Bernt Arne Ødegaard
Sean Foley: Macquarie University, Australia
Amy Kwan: University of Sydney, Australia
Richard Philip: University of Sydney, Australia
Bernt Arne Ødegaard: University of Stavanger, Postal: University of Stavanger, NO-4036 Stavanger, Norway
Abstract: The Covid-19 epidemic has caused some of the largest - and fastest - market dislocations in modern history. Contemporaneous with the significant fall in equity market values is the evaporation of market liquidity. We document the evolution of transactions costs, depth and rewards to liquidity suppliers across a variety of countries affected by the virus. We show that transactions costs increase sharply in a coordinated fashion across global markets, with depth drying up almost overnight. The withdrawal of global liquidity suppliers is correlated with the increase of over 400% in margin requirements, driving a pro-cyclical downwards liquidity spiral. These affects are shown to be concentrated in securities most exposed to electronic market-makers.
23 pages, July 8, 2020
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