Title: Liquidity volatility and spillover effects: evidence from the UK-USA and East Asian countries

Authors: Sung Lim; Evangelos Giouvris

Addresses: SoM, Royal Holloway, University of London, Egham Hill, Egham, TW20 0EX, UK ' SoM, Royal Holloway, University of London, Egham Hill, Egham, TW20 0EX, UK

Abstract: Most studies in the area of spillovers concentrate on return volatility and how this transmits between different markets. Liquidity volatility and potential spillovers on the other hand have attracted very little attention which is disproportional to the importance of liquidity. This empirical study makes an attempt to fill this gap in the literature and investigates liquidity volatility spillovers between the UK and East Asian stock markets (Japan, China, Hong Kong and Korea) and between the UK and the USA from 2006 to 2010. We use GARCH-M models and Granger causality tests. Liquidity is captured by absolute and proportional spread. Liquidity volatility for all countries in the sample is high and persistent. We also confirm the existence of significant liquidity volatility spillover effects using both methods mentioned above for UK-USA, UK-China, UK-Hong Kong and UK-Korea. Results for UK-Japan indicate that there is a weak spillover effect between the two countries if any at all.

Keywords: liquidity volatility; spillover effects; GARCH-M; Granger causality; UK; United Kingdom; USA; United States; stock markets; Japan; China; Hong Kong; Korea.

DOI: 10.1504/IJFERM.2015.068859

International Journal of Financial Engineering and Risk Management, 2015 Vol.2 No.1, pp.48 - 71

Received: 08 Sep 2014
Accepted: 27 Nov 2014
Published online: 15 Apr 2015 *