Hong Kong University of Science and Technology
The authors provide a simple theoretical analysis based on Kyle's (1985) framework, and demonstrate how stock price synchronicity can affect the adverse information risk that market makers face and therefore the liquidity of the stock. Their empirical evidence is consistent with their theoretical conjecture. They find that stocks which co-move more with the market index have higher liquidity, computed based on effective spread, price impact or Amihud illiquidity measures. The results are obtained after controlling for cross-sectional differences in firm size, price levels, total and idiosyncratic volatilities, and are robust to both S&P and non S&P index stocks.