COVID-19 and Stock Market Liquidity: An Analysis of Emerging and Developed Markets

Abstract

Using a panel of indices for five developed market and five emerging markets for the period from 31 December 2019 to 19 June 2020, the relationship between stock market liquidity and COVID-19 pandemic is examined. The study is the first to interrogate nexus using three measures of liquidity, the percentage spread, market depth and Amihud's (2002) ILLIQ measure. The pandemic is a global health condition with financial market implications, the results indicate that, stock market liquidity improved as we found a negative and significant relationship between illiquidity and COVID-19 across all the liquidity measures in all markets. However, improvements in stock market liquidity were more prevalent in developed markets relative to emerging markets. The results show that volatility negatively affected liquidity when illiquidity was measured by spread. Future research should focus on the impact of quantitative easing on stock markets liquidity during market turmoil.