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The Causality Between Liquidity and Volatility: New Evidence from China’s Stock Market

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Part of the Advances in Intelligent Systems and Computing book series (AISC,volume 1190)

Abstract

In the causality framework, this paper aims to thoroughly investigate the relationship of liquidity and volatility in China’s stock market. Not only nonlinear Granger causality test but also time-varying VAR model and quantile regression are conducted in order to provide an informative picture for investors in this emerging stock market. Overall, their relationship in China’s stock market is bi-directional, however, the non-linear causality from liquidity to volatility is more significant. Furthermore, their relationship is dynamic and varies over time. When the market is in a turbulent period, the dynamic effect of liquidity on volatility is more remarkable than it is when the market is in a stable period. These findings could benefit stock market investors in the context of risk management and portfolio allocation.

Keywords

  • Stock market
  • Liquidity
  • Volatility
  • Quantile regression
  • Granger causality

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Acknowledgements

The authors are grateful for financial support from the National Natural Science Foundation of China [71901158], the China Postdoctoral Science Foundation [2018M643512], the Full-time Postdoctoral Research and Development Funds of Sichuan University [skbsh2019-41], the Fundamental Research Funds for the Central Universities [2019B02], the Sichuan Social Science Planning Project [SC18C014], and the Innovation Spark Project of Sichuan University [2018hhf-42].

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Correspondence to Yanyan Xu .

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Liu, J., Xu, Y., Zhu, C. (2020). The Causality Between Liquidity and Volatility: New Evidence from China’s Stock Market. In: Xu, J., Duca, G., Ahmed, S., García Márquez, F., Hajiyev, A. (eds) Proceedings of the Fourteenth International Conference on Management Science and Engineering Management. ICMSEM 2020. Advances in Intelligent Systems and Computing, vol 1190. Springer, Cham. https://doi.org/10.1007/978-3-030-49829-0_18

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