Liquidity Dynamics of Indian Stock Market in Financial Shocks: Extreme Value Theory

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DOI: 10.4236/tel.2018.814190    970 Downloads   3,203 Views  Citations

ABSTRACT

The paper tries to capture the liquidity dynamics in the case of extreme events such a soil price shock and the sub-prime crisis by considering trading probability (TP), market efficiency coefficient (MEC) and total volume (TV) as liquidity measures in the Indian context. Using extreme value theory (EVT), the results provide evidence for the presence of significant liquidity risk in the Indian market. The results reveal a low observed value of TP during the sub-prime financial crisis. Based on the analyses of MEC, it can be concluded that despite the presence of liquidity risk, the Indian market is quite resilient even in extreme conditions. It can also be concluded that Indian market is risky for speculators; however for long-term investment liquidity risk is lower for BSE 500 indexed shares. The study has implications in exploring how market participants rebalance their portfolios in response to liquidity uncertainty.

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Jha, S. , Bhattacharya, M. and Bhattacharya, S. (2018) Liquidity Dynamics of Indian Stock Market in Financial Shocks: Extreme Value Theory. Theoretical Economics Letters, 8, 3062-3072. doi: 10.4236/tel.2018.814190.
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