Commonality in liquidity: An empirical examination of emerging order-driven equity and derivatives market

• Emerging order-driven markets exhibit commonality in liquidity.
• Commonality increases with market value, more for derivatives than spot market.
• Information asymmetry acts as a determinant of commonality across markets.
• Consistent findings across call and put options.
• Negligible evidence of cross-sectional error correlation for liquidity proxies.

Using a sample of actively traded stocks and options from emerging order-driven market, this study examines and provides satisfactory evidence for the existence of commonality in liquidity for both spot and derivatives market. For equities, the market- and industry-wide commonality remain strong even after controlling for market returns and individual firm volatility and for options after accounting for the underlying stock market liquidity and implied volatility. Compared to the stock market, options market exhibit an increased commonality in liquidity with market capitalization. Here, information asymmetry acts as an important microstructure related source of commonality in liquidity across markets. The findings are robust across call and put options with negligible evidence of cross-sectional error correlation for all the liquidity measures.