Volume, liquidity, and liquidity risk

Interesting paper, made me go hmmm.

Timothy C. Johnson, Volume, liquidity, and liquidity risk, Journal of Financial Economics Volume 87, Issue 2, , February 2008, Pages 388-417.

Abstract:
Many classes of microstructure models, as well as intuition, suggest that it should be easier to trade when markets are more active. In the data, however, volume and liquidity seem unrelated over time. This paper offers an explanation for this fact based on a simple frictionless model in which liquidity reflects the average risk-bearing capacity of the economy and volume reflects the changing contribution of individuals to that average. Volume and liquidity are unrelated in the model, but volume is positively related to the variance of liquidity, or liquidity risk. Empirical evidence from the U.S. government bond and stock markets supports this new prediction.

Technorati Tags: market risk,risk management

the link between the liquidity of a firm's stock and its ownership structure

We examine the link between the liquidity of a firm's stock and its ownership structure, specifically, how much of the firm's stock is owned by insiders and institutions, and how concentrated is their ownership. We find that the liquidity-ownership relation is mostly driven by institutional ownership rather than insider ownership. Importantly, liquidity is positively related to total institutional holdings but negatively related to institutional blockholdings. This finding is consistent with the hypothesis that while the level of institutional ownership proxies for trading activity, the concentration of such ownership proxies for adverse selection. Journal of Financial Markets 10 (2007) 219–248, Ownership level, ownership concentration and liquidity by Amir Rubin.

The study is mainly in the USA, but frankly, in my opinion, the results can be extrapolated in the UK as well, similar structures and to a lesser extent to Europe. This is particularly poignant given the European bank's situation where we would have expected institutional blockholding to protect us (look at the interlocking web of ownerships of any big european bank) but on the other hand, because of electronic trading, they got side swiped by the hedgies. (another example how corporate governance laws and structures are horribly behind the market and IT developments).

My friend, Professor Christian De-Cock, recently ran a big corporate governance research project for the ESRC and i helped him out in a small way, it was real fun, but when it gets published, I will post the results. It related to how corporate governance is changing its spots.