Through Stormy Seas: How Fragile is Liquidity Across Asset Classes?

Study on liquidity and bid-ask spreads across global markets.

Paper Metadata

• Publication Date: 2025-05-19

• Source: SSRN

• Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5254046

• Authors

  • Nihad Aliyev, Haymarket, Sydney, NSW 2007, Australia,

  • Matteo Aquilina, Basel, Switzerland,

  • Khaladdin Rzayev (Contact Author), Old College, South Bridge, Edinburgh, Scotland EH8 9JY, United Kingdom,

  • Xingyu Sonya Zhu, Centralbahnplatz 2, CH-4002 Basel, Switzerland,

Keywords

• trading cost

• liquidity distribution

• market fragility

Notes for Review

Recommendation: 92%

This paper provides a comprehensive analysis of liquidity and bid-ask spreads across global financial markets, including equities, bonds, and foreign exchange (FX) in the US, Europe, and Japan. The authors utilize high-frequency data to study the distribution of bid-ask spreads and identify structural breaks in the mean and skewness, mapping them to macroeconomic events, market structure changes, and regulatory reforms. The study highlights the importance of liquidity in determining trading costs, with increased skewness raising trading costs by up to $1 billion annually in US equities. The paper contributes to the existing literature by providing a detailed analysis of the distribution of liquidity across different asset classes and regions. The authors use a range of data sources, including Tick History data, FX volatility indexes, and trading volume data from various exchanges. The study's findings have implications for market participants, regulators, and policymakers, highlighting the need for continued monitoring of liquidity and market microstructure. Key takeaways include the importance of high-frequency data in evaluating trading costs, the prevalence of highly illiquid periods in stock markets, and the need for robust risk management strategies to mitigate the impact of liquidity shocks

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Abstract

Liquidity has improved across global markets, but fragility concerns remain. We study the distribution of bid-ask spreads across equities, bonds, and foreign exchange (FX) in the US, Europe and Japan. While average and standard deviation of spreads have decreased since 1990s, skewness and kurtosis have increased, especially in bond and most equity markets, but not FX. We identify structural breaks in the mean and skewness and map them to macroeconomic events, market structure changes, and regulatory reforms. Simulations show that increased skewness raises trading costs-up to $1 billion annually in US equities-even when few trades require urgent execution.