CAFO Working Papers,
Linnaeus University, Centre for Labour Market Policy Research (CAFO), School of Business and Economics

Abstract: In this paper, the time-series dynamics of liquidity on the Scandinavian stock exchanges between January 1993 and June 2005 are studied with liquidity indices. We observe that on all Scandinavian stock exchanges, liquidity has increased during the examined period. However, the monthly variation in liquidity is large. Moreover, within these order-driven stock exchanges, the relationship between the market variables return, volatility, trading activity,and liquidity is examined in a VAR framework. In line with previous findings on the U.S. stock markets, we find that an increase in return predicts higher liquidity, that there is a negative relationship between volatility and liquidity, and that a positive shock in trading activity predicts increasing liquidity. However, in comparison to previous studies on U.S. stock exchanges, our results indicate that liquidity is more dependent on trading activity in the Scandinavian order-driven markets. Finally, the linkage between these stock exchanges in terms of liquidity is explored with VAR. In these VAR, we find evidence of liquidity spillover between the Scandinavian stock exchanges.

Keywords: Liquidity; Market microstructure theory; Scandinavian stock markets; Liquidity spillover; Vector autoregression analysis

JEL-codes: C22; G11; G12

75 pages, December 1, 2008

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