Date of Award


Degree Type


Degree Name


Degree Program

Financial Economics


Economics and Finance

Major Professor

Wei, Peihwang; Turunen-Red, Arja

Second Advisor

Mukherjee, Tarun

Third Advisor

Naka, Atsuyuki

Fourth Advisor

Whitney, Gerald


This dissertation addresses issues concerning liquidity and its volatility. It consists of two essays. The first essay, "Liquidity, Macro Factors and the U.S. Equity Flows to Emerging Markets", examines the role of liquidity on equity flows from the U.S. to fifteen emerging markets around the world. Since liquidity has many dimensions, an emphasis is placed on utilizing various measures of liquidity. Moreover, both static and dynamic analyses, as well as short and long-horizon regressions, are performed to investigate the research questions. The results suggest that a liquid market attracts flows, after controlling for market size, political openness, exchange rate and other macro factors. Additionally, evidence indicates that the importance of liquidity varies across regions. For instance in the Asian region, the relation between equity flows and volume-related liquidity is weak while that between flows and price impacts of trading is strong. Evidence also supports the relevance of macro factors such as a country's economic freedom. The second essay, "Liquidity Risk Premium Puzzle and Possible Explanations", attempts to resolve the liquidity risk puzzle: a negative relation between returns and liquidity risk, documented by Chordia, Subrahmanyam, and Anshuman (2001b), by employing alternative liquidity measures and by incorporating factors that might potentially affect the relation. The main findings are as follows. The relation between stock returns and volatility of liquidity depends on the measure of liquidity. When liquidity measures are based on trading volume, the results are largely mixed, but when liquidity is measured based on price impact of trading, the relation between returns and volatility of price impacts is positive, as expected. The results are sensitive to time periods examined. Moreover, during extreme down markets, the aversion to liquidity volatility is lower, suggesting behavioral bias might potentially address the puzzle. Empirical findings also suggest that liquidity risk premium tends to be greater for small stocks. Finally, when the VIX index is included as a proxy for investor sentiment, the results indicate that the relation between returns and liquidity risk is significantly positive in four out of five liquidity measures. In sum, the empirical analysis partially but not completely addresses the puzzle.


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