Commonality in Liquidity in Shanghai Stock Exchange

Traditionally, the market microstructure research focuses on the single asset-specific attributes of liquidity. This paper emphasizes the commonality aspect of liquidity across assets in Shanghai Stock Exchange (SHSE) market. Using data of the common A shares of SHSE-listed firms during the sample period from 1994 to 2007, we find that the liquidity commonality contains both market-wide and industry-wide components in SHSE, and is prevalent across different market value sets. Through assuming a similar pattern in the systematic risk of firm's return, we find a co-integrated relation between systematic risk and systematic liquidity, which is mainly due to their common aggregate determinants as market volatility, market return, and market liquidity.