Time variation in liquidity: The role of market-maker inventories and revenues

Carole Comerton-Forde, Terrence Hendershott, Charles M. Jones, Pamela C. Moulton, Mark Seasholes

Research output: Contribution to journalArticle

84 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)295-331
Number of pages37
JournalJournal of Finance
Volume65
Issue number1
DOIs
StatePublished - Feb 2010
Externally publishedYes

Fingerprint

Time variation
Market makers
Liquidity
Revenue
Financing constraints
Stock volatility
Balance sheet
Mergers
Suppliers
New York Stock Exchange
Income

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Time variation in liquidity : The role of market-maker inventories and revenues. / Comerton-Forde, Carole; Hendershott, Terrence; Jones, Charles M.; Moulton, Pamela C.; Seasholes, Mark.

In: Journal of Finance, Vol. 65, No. 1, 02.2010, p. 295-331.

Research output: Contribution to journalArticle

Comerton-Forde, Carole ; Hendershott, Terrence ; Jones, Charles M. ; Moulton, Pamela C. ; Seasholes, Mark. / Time variation in liquidity : The role of market-maker inventories and revenues. In: Journal of Finance. 2010 ; Vol. 65, No. 1. pp. 295-331.
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