COVID-19 Pandemic and Liquidity Commonality
38 Pages Posted: 31 Mar 2022 Last revised: 18 May 2022
Date Written: February 15, 2022
Abstract
This paper shows how the US, UK, Germany and China are financially connected through their stock market liquidity in the COVID-19 pandemic. Using high frequency data on transaction costs, we identify a decrease in stock market liquidity and an increase in liquidity commonality amongst these countries after the World Health Organisation (WHO) declared the global pandemic. Furthermore, there is increased transmission of liquidity shocks from the country with higher COVID new cases and COVID-related death cases, indicating that markets are more connected with increased outbreak severity. Our results suggest that COVID-19 intensifies liquidity risk and worsens the vulnerability of individual stock market's liquidity to aggregate liquidity shocks in financial markets.
Keywords: COVID-19, liquidity commonality, transaction cost, stock markets
JEL Classification: G01, G14, G15, G18
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