Liquidity Commonality with Factor Models

Author

Ernesto Garcia III, The Graduate Center, City University of New YorkFollow

Date of Degree

2-2022

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

Wim Vijverberg

Committee Members

Chu-Ping Vijverberg

Christos Giannikos

Subject Categories

Data Science | Econometrics | Finance | Longitudinal Data Analysis and Time Series

Keywords

commonality in liquidity, market microstructure, factor models, principal components, passive investing, exchange traded funds

Abstract

Market microstructure research has recently devoted attention to a phenomenon called commonality in liquidity. In this dissertation, I will analyze commonality in liquidity using a novel factor model approach and a generalized definition of commonality in liquidity. This analysis will show that commonality in liquidity is rarely a marketwide phenomenon and is mostly restricted to stocks with a large market capitalization. Additionally, commonality in liquidity is a very recent phenomenon whose appearance coincides with a rise in passive investing after the Dotcom Bubble burst and, more so, after the 2008 Financial Crisis. I will present evidence that suggests commonality in liquidity is a function of passive investing strategies and not dependent on the rise in use of certain investment vehicles such as exchange traded funds (ETFs).

Recommended Citation

Garcia, Ernesto III, "Liquidity Commonality with Factor Models" (2022). CUNY Academic Works.
https://academicworks.cuny.edu/gc_etds/4676