Liquidity of the Hong Kong Stock Market since the Asian Financial Crisis

This paper looks into how the liquidity of Hong Kong stock market has evolved since the Asian financial crisis, and examines the determinants of changes in liquidity. Various conventional liquidity indicators are constructed for the study period from 1997 to June 2001, and they show that, having deteriorated during the Asian financial crisis and the Russia crisis, market liquidity has mostly recovered to the pre-crisis level in the more recent period. However, these conventional liquidity indicators have the drawbacks of being not able to capture fully the dynamics of liquidity. Thus, a GARCH model is developed for five selected stocks to relate the sensitivity of their price movements to net order flows, using a unique set of 30-second tick-by-tick data of the Hong Kong Stock Exchange. Empirical results from our model illustrate clearly a sharp deterioration of market liquidity during the crises, followed by an apparent recovery in the post-crisis period. Based on a simple OLS regression estimation, we also analyse the determinants of the time-variation of market liquidity. It is found that financial crises exert their influence on local liquidity mainly through their effect on domestic interest rates and price volatility, while global liquidity and risk conditions also play a significant role. ∗ The views expressed in this paper are solely our own and not necessarily those of the Hong Kong Monetary Authority (HKMA). We are grateful to Stefan Gerlach, Grace Lau, and internal seminar participants for useful comments and Polly Lai for excellent secretarial assistance. All remaining errors are ours.