TY - JOUR
T1 - Time variation in liquidity
T2 - The role of market-maker inventories and revenues
AU - Comerton-Forde, Carole
AU - Hendershott, Terrence
AU - Jones, Charles M.
AU - Moulton, Pamela C.
AU - Seasholes, Mark S.
PY - 2010/2
Y1 - 2010/2
N2 - We show that market-maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity-supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market-level and specialist firm-level spreads widen when specialists have large positions or lose money. The effects are nonlinear and most prominent when inventories are big or trading results have been particularly poor. These sensitivities are smaller after specialist firm mergers, consistent with deep pockets easing financing constraints. Finally, compared to low volatility stocks, the liquidity of high volatility stocks is more sensitive to inventories and losses.
AB - We show that market-maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity-supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market-level and specialist firm-level spreads widen when specialists have large positions or lose money. The effects are nonlinear and most prominent when inventories are big or trading results have been particularly poor. These sensitivities are smaller after specialist firm mergers, consistent with deep pockets easing financing constraints. Finally, compared to low volatility stocks, the liquidity of high volatility stocks is more sensitive to inventories and losses.
UR - http://www.scopus.com/inward/record.url?scp=74249086247&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=74249086247&partnerID=8YFLogxK
U2 - 10.1111/j.1540-6261.2009.01530.x
DO - 10.1111/j.1540-6261.2009.01530.x
M3 - Article
AN - SCOPUS:74249086247
SN - 0022-1082
VL - 65
SP - 295
EP - 331
JO - Journal of Finance
JF - Journal of Finance
IS - 1
ER -