Liquidity, liquidity risk, and information flow: Lessons from an emerging market

• We analysis the importance of information flow on stock market for a MENA country.
• Public and private information flows are dominant factors of liquidity in Tunisian market.
• The sequential arrival of public information is the dominant factor generating increases in liquidity risk related to the bid-ask spread.
• The arrival of contemporaneous private information is the dominant factor generating increases in liquidity risk related to the depth at best limit.
• Liquidity risk persistence disappears when trading volume and order imbalance are included as explanatory variables in the conditional variance equation.

This paper examines the role of public and private information flows in intraday liquidity and intraday liquidity risk in the Tunisian stock market. Our empirical results are based on ARMA and GARCH-type models and show that, for major Tunisian stocks, gradually elapsed public information together with gradually elapsed private information in the market is the dominant factor in liquidity improvements in the Tunisian stock market. Liquidity improvements are generated by a decrease in the bid-ask spread accompanied by an increase in the depth at best limit. Our results clearly indicate that the arrival of public information in a sequential manner is the dominant factor generating increases in liquidity risk related to the bid-ask spread, while the advent of private information in a contemporaneous manner is the dominant factor generating increases in liquidity risk related to the depth at best limit. Additionally, our results show that liquidity risk persistence disappears when trading volume and order imbalance are included as explanatory variables in the conditional variance equation.