The strength of long-run commonality is found to be highest in natural resources and infrastructure sector.
Authors
Gaurav Kumar, Jindal Global Business School, O.P Jindal Global University, Sonipat, Haryana, India.
Arun Kumar Misra, inod Gupta School of Management, Indian Institute of Technology Kharagpur, West Bengal, India.
Summary
The purpose of this paper is to investigate long-run commonality in liquidity using multiple proxies computed from limited order book data of NIFTY50 stocks. The findings indicate the existence of systematic liquidity or commonality on NIFTY50 market and comprising industries.
Methodology
The sample comprises all intraday transactions corresponding to NIFTY 50 stocks for April 2015. The study runs firm by firm time series regressions to test the concept of long-run commonality, while controlling other effects.
Findings
Strong evidence is found in support of long-run commonality across three liquidity measures. On the basis of significance (10%) of long-run commonality beta (βLR), the strength of long-run commonality is found to be highest in natural resources and infrastructure sector. Portfolios having greater exposure to these sectors will face diversification risk to a great extent.
Practical implications
Knowledge of long-run commonality helps portfolio managers in formulating diversification strategies and reshuffling the portfolio over the period. Commonality risk being non-diversifiable is a policy concern for regulators and central bankers. Its empirical evidence will assist in managing exchange organization and thus preventing market crashes because of sudden liquidity evaporation.
Originality
Although there are recent studies documenting commonality in short run, little empirical work has been done on commonality in the long run and in emerging markets such as India. This research contributes to the literature by testing concept of commonality in long-run on NIFTY50 stocks using detailed transaction data from National Stock Exchange.
Published in: Journal of Indian Business Research
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