Determinants of commonality in liquidity: Evidence from an order-driven emerging market

Using an extensive, time-series, cross-sectional data-set of actively traded Indian stocks with up to 1.75 million firm-day observations, we discern the key determinants of commonality in liquidity among emerging markets. The paper shows evidence for both supply-side and demand-side factors contributing to liquidity commonality. However, the results are more supportive towards supply-side rationale for liquidity commonality among the firms where regulators and banks play an important source of commonality in liquidity, especially during market turmoil. Results are partially driven by the fact that the Indian stick exchange is an order-driven market. Economic activities like cheap exports and undervalued currency, rather than correlated trading by the institutional investors determine the demand for liquidity. These findings endorse the effect of high firm value, market return, liquidity, volatility, turnover, and alternate proxies of commonality in liquidity estimation.