Liquidity skewness in the London Stock Exchange

Hsieh, Tsung Han; Li, Youwei; McKillop, Donal G.; Wu, Yuliang

Abstract

We study liquidity on the London Stock Exchange. We find that the average bid-ask spread declines, but that the skewness of the spread increases. These results are robust to firm size, trading volume and price level. Our findings hold when the bid-ask spread is estimated utilising high frequency data. We find that the bid-ask spread prior to earnings announcements dates is significantly higher than that of post earnings announcements, suggesting that asymmetric information has driven the increase in liquidity skewness. We also find that the effect of earnings announcements is more pronounced in the 2007 global financial crisis, consistent with the notion that extreme market downturns amplify asymmetric information. Our overall evidence also implies that increased competition and transparent trading environments limit market makers' abilities to cross-subsidize bid-ask spreads between periods of high and low levels of asymmetric information.

Citation

Hsieh, T. H., Li, Y., McKillop, D. G., & Wu, Y. (2018). Liquidity skewness in the London Stock Exchange. International review of financial analysis, 56, 12-18. https://doi.org/10.1016/j.irfa.2017.12.006

• Journal Article Type: Article
• Acceptance Date: Dec 14, 2017
• Online Publication Date: Dec 19, 2017
• Publication Date: 2018-03
• Deposit Date: Mar 19, 2019
• Publicly Available Date: Jun 20, 2019
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 56
• Pages: 12-18
• DOI: https://doi.org/10.1016/j.irfa.2017.12.006
• Keywords: Asymmetric information; Bid-ask spread; Liquidity; London Stock Exchange; Skewness
• Public URL: https://hull-repository.worktribe.com/output/1113459
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1057521917301928?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Liquidity skewness in the London Stock Exchange; Journal Title: International Review of Financial Analysis; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.irfa.2017.12.006; Content Type: article; Copyright: © 2017 Elsevier Inc. All rights reserved.
• Contract Date: Mar 21, 2019