The outbreak of COVID-19 and stock market liquidity: Evidence from emerging and developed equity markets

The outbreak of the novel corona virus has heightened concerns surrounding the adverse financial effects of the outbreak on stock market liquidity and economic policies. This paper contributes to the emerging strand of studies examining the adverse effects of the virus on varied aspect of global markets. The paper examines the causality and co-movements between COVID-19 and the aggregate stock market liquidity of China, Australia and the G7 countries (Canada, France, Italy, Japan, Germany, the UK and the US), using daily three liquidity proxies (Amihud, Spread and Traded Value) over the period December 2019 to July 2020. Our empirical analysis encompasses wavelet coherence and phase-differences as well as a linear Granger causality test. Linear causality test results suggest that a causal relationship exists between the number of cases of COVID 19 infections and stock market liquidity. To quantitatively examine the degree of causality between COVID-19 outbreak and stock market liquidity, we employ the continuous wavelet coherence approach with results revealing the unprecedented impact of COVID-19 on stock market liquidity during the low frequency bands for countries that were hard hit with the COVID-19 outbreak, i.e., Italy, Germany, France, the UK and the US. Further, evidence shows that there is a heterogeneous lead-lag nexus across scales for the entire period of the study.