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Liquidity commonality and the intervalling effect

Hillier, D.J. and Hillier, J. and Khaw, K. (2007) Liquidity commonality and the intervalling effect. Accounting and Finance, 47 (3). pp. 495-512. ISSN 0810-5391

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Abstract

Past studies of liquidity commonality have reported conflicting findings regarding the relationship between market liquidity and firm size. The present paper provides empirical evidence that underlying estimation problems might be responsible for these results. We develop a model of information and spreads that provides some insights into the firm size-liquidity relationship. Our empirical evidence confirms the main testable implications of the model and presents evidence that the presence and strength of common covariability in liquidity depends upon the interval over which liquidity movements are measured. These intervalling effects are caused by delays in information being incorporated into bid and ask spreads