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Time Variation in Liquidity: The Role of Market-Maker Inventories and Revenues

The Journal of finance (New York), 2010-02, Vol.65 (1), p.295-331 [Peer Reviewed Journal]

2010 American Finance Association ;2009 the American Finance Association ;Copyright Blackwell Publishers Inc. Feb 2010 ;ISSN: 0022-1082 ;EISSN: 1540-6261 ;DOI: 10.1111/j.1540-6261.2009.01530.x ;CODEN: JLFIAN

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Title:
Time Variation in Liquidity: The Role of Market-Maker Inventories and Revenues
Author: COMERTON-FORDE, CAROLE ; HENDERSHOTT, TERRENCE ; JONES, CHARLES M. ; MOULTON, PAMELA C. ; SEASHOLES, MARK S.
Subjects: Arithmetic mean ; Balance sheets ; Business structures ; Coefficients ; Financial analysis ; Financial economics ; Income statements ; Inventories ; Liquidity ; Liquidity risk ; New York Stock Exchange ; Revenue ; Spread ; Stock exchange ; Stock exchange specialists ; Stock exchanges ; Stock prices ; Studies ; Time series ; Trade volume ; U.S.A ; Volatility
Is Part Of: The Journal of finance (New York), 2010-02, Vol.65 (1), p.295-331
Description: We show that market-maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity-supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market-level and specialist firm-level spreads widen when specialists have large positions or lose money. The effects are nonlinear and most prominent when inventories are big or trading results have been particularly poor. These sensitivities are smaller after specialist firm mergers, consistent with deep pockets easing financing constraints. Finally, compared to low volatility stocks, the liquidity of high volatility stocks is more sensitive to inventories and losses.
Publisher: Malden, USA: Blackwell Publishing Inc
Language: English
Identifier: ISSN: 0022-1082
EISSN: 1540-6261
DOI: 10.1111/j.1540-6261.2009.01530.x
CODEN: JLFIAN
Source: Alma/SFX Local Collection

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Time Variation in Liquidity: The Role of Market-Maker Inventories and Revenues

2010 American Finance Association ;2009 the American Finance Association ;Copyright Blackwell Publishers Inc. Feb 2010 ;ISSN: 0022-1082 ;EISSN: 1540-6261 ;DOI: 10.1111/j.1540-6261.2009.01530.x ;CODEN: JLFIAN

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