Systematic liquidity and the funding liquidity hypothesis

In order to reconcile weak evidence of supply-side determinants of commonality in liquidity in previous studies, we examine commonality in liquidity in China over the period 1995-2012. Consistent with supply-side explanations, we find that market declines and market volatility increase liquidity commonality. To identify the direct relationship between the supply-side determinants and commonality in liquidity, we provide two specific tests and show that an increase in market participants has a negative effect on liquidity commonality, while the split-share-structure reform in 2005-2007 that results in a large increase in shares supply has a positive impact on liquidity commonality. Finally, we find that commonality in liquidity also has a real impact on the economy.