Intraday Liquidity Patterns in Indian Stock Market

Transcription

1 Intraday Liquidity Patterns in Indian Stock Market 1 Intraday Liquidity Patterns in Indian Stock Market Dr. R. Krishnan Indira Gandhi Institute of Development Research (kittu@igidr.ac.in) Dr. Vinod Mishra Monash University (vinod.mishra@monash.edu) 27 th International Conference of the American Committee for Asian Economic Studies (ACAES) Saturday, 27 October 2012

2 Intraday Liquidity Patterns in Indian Stock Market 2 Outline 1 Introduction 2 NSE: Constituents and Main Aspects 3 Intraday Market Liquidity: Issues and Measures Issues in measuring liquidity Dataset and Adjustment Liquidity measures 4 Empirical Results Intraday Liquidity Patterns Correlations between the liquidity measures Commonality among liquidity measures 5 Conclusions

3 Intraday Liquidity Patterns in Indian Stock Market Introduction 3 Liquidity Liquidity of a stock is generally defined as the ability to trade large volumes with minimal price impact, cost and delay. Simple definition, yet... No universally accepted measure. Different ways of measuring market liquidity for different segments of financial market. Frequency of data is also important in measuring liquidity.

4 Intraday Liquidity Patterns in Indian Stock Market Introduction 4 Frequency of Data Development of stock market over years Cherif and Gazdar, (2010): liquidity is measured as traded value ratio (ratio of turnover to GDP) Levine and Zevros (1998): liquidity is measured as the turnover ratio (ratio of turnover to market capitalization) However, if we are interested in studying the market activity at higher frequency, these measures are useless.

5 Intraday Liquidity Patterns in Indian Stock Market Introduction 5 A Liquid Market A definition relevant for higher frequency Kyle (1985): a liquid market should have depth, tightness and resilience. Depth: the ability of the market to accommodate large trade volumes, with little impact on prices. Resilience: A market that bounces back from a price shock or can absorb a shock and restore the balance amongst orders quickly is a resilient market. Tightness: cost incurred in a transaction, irrespective of market price. Bid-Ask spread, is an indicator of tightness and a narrow spread indicates a liquid market. Necessity to consider all three measures either individually or jointly to decide on the liquidity of individual stocks or a market.

6 Intraday Liquidity Patterns in Indian Stock Market Introduction 6 Why Study Liquidity? Liquidity measures give us an idea about the costs involved in trading stocks.(amihud, Mendelsen, Pedersen 2005) Useful for decision making by market participants and regulators. Is particularly useful for emerging markets, with limited portfolio choices and less transparency. Empirical or stylised facts that emanate from such studies help us build theoretical models explaining the intraday behaviour of the underlying market. Helpful in understanding the market microstructure.

7 Intraday Liquidity Patterns in Indian Stock Market Introduction 7 Motivation Liquidity is a multi-dimensional measure, yet the two biggest stock exchanges (BSE and NSE) rely on a single measure of liquidity. Study of intraday high-frequency data on the most active stocks in Indian stock market. First study of its kind in an emerging market for an order driven market. Studies on commonality among liquidity proxies in pure order driven markets are limited. Presence of commonality in liquidity proxies implies that assessing liquidity using any single measure is weak and there are common factors affect returns and flows and hence supports the idea that liquidity contributes to systematic,market wide risk, which has to be priced.

8 Intraday Liquidity Patterns in Indian Stock Market NSE: Constituents and Main Aspects 8 NSE: Constituents and Main Aspects Biggest stock exchange of Indian in terms of market capitalisation An order driven market, fully anonymous and an automated screen based trading system, operating on the National Exchange for Automated Trading (NEAT). Main Index: NIFTY, based on 50 most traded stocks, representing 21 sectors of economy and accounting for roughly 65% of free float market capitalisation.

9 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 9 Issues in measuring liquidity There is no single all-encompassing measure of market liquidity. While a liquid market implies absence of market impacts, market efficiency instead requires continuous and significant price adjustments to market news. Longer duration of data and higher frequency gives more reliable estimates. Chordia, Roll and Subrahmanyam (2001), analyse 3.5 billion intra day observations for more than over 10 years over a comprehensive sample NYSE stocks on each trading day.

10 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 10 Issues in measuring liquidity Market system and trading mechanism also play a role in deciding a valid proxy for liquidity. Market with market maker Vs. pure limit order market. Institutional changes, ways by which a stock market operates, changes in the government policy over time, structural changes in the domestic or external economy may all affect the liquidity measures, thereby making at least some of them inconsistent over time. Mixed evidence on the presence of commonality among liquidity measures.

11 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 11 Dataset and Adjustments Source: Thomson Reuters Tick History Database. Near real-time historical market data service. Captures trades and quotes data from Reuters real-time network and provides it in a near real time basis. Data on trades and quotes for the period of 1 January 2009 to 31 December 2009 was downloaded for 20 most active stocks. For the purpose of this initial round of selection, the active stocks were decided by their market capitalisation in the year

12 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 12 Dataset and Adjustments Cleaned for outliers and errors and sampled at 5 minute intervals. Cubic splines to interpolate any missing values generated in the process of sampling. Data on 242 days of trading, after accounting for weekends, holidays and 18th May Data on trades and quotes for the period of 1 January 2009 to 31 December 2009 was downloaded for 20 most active stocks. The 5-minute sampling frequency gave us 68 data points per day and a total of 16, 388 observations per stock for 241 trading days in 2009.

13 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 13 Correlations between the liquidity measures Insert Table 1 here.

14 Table 1: Stocks selected for study 34 RIC ISIN Name Turnover % Share Market % Share in (INR Crore) in Total Capitalisation Total Market Turnover as on Capitalisation (INR Crore) INFY ZEE INE009A01021 INE256A01028 INFOSYS TECHNOLOGIES LTD. ZEE ENTERTAINMENT ENT LTD RELI INE002A01018 RELIANCE INDUSTRIES LTD WIPR INE075A01022 WIPRO LTD ITC INE154A01025 ITC LTD LART INE018A01030 LARSEN & TOUBRO LTD HLL INE030A01027 HINDUSTAN UNILEVER LTD SBI INE062A01012 STATE BANK OF INDIA RANB INE015A01028 RANBAXY LABS LTD TISC INE081A01012 TATA STEEL LIMITED HCLI INE236A01020 HCL TECHNOLOGIES LTD. 5, , BHEL INE257A01018 BHEL REDY INE089A01023 DR. REDDY S LABORATORIES LTD. 6, , ICBK INE090A01013 ICICI BANK LTD HDBK INE040A01018 HDFC LTD SAIL INE114A01011 STEEL AUTHORITY OF INDIA TEML INE669C01028 TECH MAHINDRA LTD JNSP INE749A01030 JINDAL STEEL & POWER LTD CIPL INE059A01026 CIPLA LTD HALC INE038A01020 HINDALCO INDUSTRIES LTD. 4, ,

15 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 14 Liquidity measures The different measures of Intraday liquidity can be broadly classified into the following categories. Spread related Measures Time and Volume related measures Multidimensional measures

16 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 15 Liquidity measures Spread related Measures Most commonly used proxies to measure the depth of a market. The difference between the ask and the bid price and its related measures give an approximate cost to be incurred when trading. Low values indicate high liquidity We have used 5 Spread related measures: Absolute spread: S t = p A t p B t Log absolute spread: ln S t = ln(p A t p B t )

17 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 16 Liquidity measures Spread related Measures Relative spread or inside spread: Effective spread: Rel(S t ) = 2(pA t p B t ) p A t + p B t Eff(S t ) = p t p M t Rolls spread: RS i = 2 COV i

18 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 17 Liquidity measures Time and Volume related Measures Volume measure are based on quantity of shares traded per time unit. High-volume trades also indicate that large volumes can be traded in a shorter time, implying a time dimension. High values of these measures indicate high liquidity. Trading volume: Turnover: N t Q t = i=1 q i N t V t = p i q i i=1

19 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 18 Liquidity measures Time and Volume related Measures Depth: Log Depth: Rupee depth: D t = q A t + q B t ln(d t ) = ln(q A t ) + ln(q B t ) Re(D t ) = qa t p A t + q B t p B t 2 Number of transactions per time unit, N t : W T t = 1 N 1 N tr i tr i 1. i=2

20 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 19 Liquidity measures Multidimensional measures Combine properties of different one-dimensional liquidity measures to give a composite measure. Quote slope: Log quote slope: Composite Liquidity: p A t p B t QS t = ln(qt A) + ln(qb t ) CL t = lnqs t = ln pa t p B t ln(q A t q B t ) 2(p A t p B t ) p M t (q A t p A t + q B t p B t )

21 Intraday Liquidity Patterns in Indian Stock Market Intraday Market Liquidity: Issues and Measures 20 Liquidity measures Multidimensional measures Amivest measure(alr): ALR t = V t r t Amihud (2002) illiquidity ratio(amr): AMR t = 1 ALR t Flow ratio(fr): Order ratio(or): F R t = V t W T t OR t = qb t q A t V t

22 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 21 Intraday Liquidity Patterns Some stylised facts reported across most markets. U-shaped pattern within a day :00 11:00 12:00 13:00 14:00 15:00 Time of Day Trading Volume Turnover Figure 1.1 Volume related liquidity measures : Trading volume and Turnover

23 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 22 Intraday Liquidity Patterns :00 11:00 12:00 13:00 14:00 15:00 Time of Day Depth Rupee Depth Log Depth Figure 1.2 Volume related liquidity measures : Depth, log Depth and Rupee Depth

24 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 23 Intraday Liquidity Patterns :00 11:00 12:00 13:00 14:00 15:00 Time of Day Number of transactions Waiting time between trades Figure 1.3 Time related liquidity measures: Average Number of transactions and average waiting time between transactions

25 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 24 Intraday Liquidity Patterns :00 11:00 12:00 13:00 14:00 15:00 Time of Day Absolute spread Relative spread Log absolute spread Effective spread Figure 1.4 Spread related liquidity measures: Absolute spread, Relative spread, Log Absolute spread and Effective spread.

26 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 25 Intraday Liquidity Patterns :00 11:00 12:00 13:00 14:00 15:00 Time of Day Quote Slope Composite Liquidity Log Quote Slope Figure 1.5 Multidimensional liquidity measures: Quote slope, Log Quote Slope and Composite Liquidity

27 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 26 Intraday Liquidity Patterns :00 11:00 12:00 13:00 14:00 15:00 Time of Day Amivest Liquidity Measure Amihud's illiquidity ratio Figure 1.6 Multidimensional liquidity measures: Amivest liquidity measure and Amihud s liquidity ratio

28 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 27 Intraday Liquidity Patterns Flow Ratio :00 11:00 12:00 13:00 14:00 15:00 Time of Day Figure 1.7 Multidimensional liquidity measures: Flow ratio

29 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 28 Intraday Liquidity Patterns Order Ratio :00 11:00 12:00 13:00 14:00 15:00 Time of Day Figure 1.8 Multidimensional liquidity measures: Order ratio

30 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 29 Intraday Liquidity Patterns Some Observations Most of the volume and time related measures reveal a U shaped-pattern suggesting that the market was liquid both at the beginning and the end of the trading hours Depth measures do not exhibit such a pronounced U-shape. The spread related measures reveal a U-shape, however, it means the liquidity is low towards both the end of business day. Some of the combined measures of volume with spread, also show that the market was not so liquid. Higher volume is not associated with narrower spreads.

31 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 30 Intraday Liquidity Patterns Some Observations Brock and Kleidon (1992): liquidity will be inelastic at both the open and end of a trading day because, such a behaviour indicates that traders are simply adjusting their portfolios to achieve an optimal portfolio mix or transfer overnight risk. All the measures are relatively less volatile except the order ratio which is very volatile during the period the market normally does not see much activity. Engle et al. (2011) : relatively less volatile liquidity of most measures, could be an indication of the presence of a deep order book where market orders are small compared to available depth. Stylised facts similar to the market with market makers.

32 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 31 Correlations between the liquidity measures Insert Table 2 here.

33 Table 2: Ranking of stocks according to different liquidity measures Q t V t D t ln(d t ) Re(D t ) W T 1t W T 2t S t ln S t Rel(S t ) Eff(S t ) RS t QS 1t ln(qst t ) CL t ALR t AMR t F R t OR t Average Rank 35 INFY ZEE RELI WIPR ITC LART HLL SBI RANB TISC HCLI BHEL REDY ICBK HDBK SAIL TEML JNSP CIPL HALC

34 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 32 Correlations between the liquidity measures Insert Table 3 here.

35 Table 3: Spearman Rank correlation between different liquidity measures Q t V t D t ln(d t ) Re(D t ) W T 1t W T 2t S t ln S t Rel(S t ) Eff(S t ) RS t QS 1t ln(qst t ) CL t ALR t AMR t F R t OR t 36 Q t 1 V t D t ln(d t ) Re(D t ) W T 1t W T 2t S t ln S t Rel(S t ) Eff(S t ) RS t QS 1t ln(qst t ) CL t ALR t AMR t F R t OR t Note: / denotes significance at 5% and at 1% respectively.

36 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 33 Correlations between the liquidity measures Some Observations Liquidity ranks expectedly differ according to the measure used. For example, HALC which is the most liquid of all stocks going by the depth and spread measures, is the most illiquid by order ratio. Market micro structure, corporate policies and institutional trading could be the primary reasons for existence of such varied rankings of stocks. Correlations amongst the measures within each group in both the one dimensional and multi-dimensional measures, are high and significant. Correlations between the various liquidity measures and Amivest liquidity ratio, ALR t, and Amihud illiquidity ratio, AMR t, are on expected lines that is positive correlation between ALR t and liquidity measures is matched by negative correlation with AMR t.

37 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 34 Commonality among liquidity measures Principal Components Analysis (PCA) of the liquidity measures. Principal components look for linear combinations of the data that explain as much variance as possible. PCA was performed on the standardised measure of: Turnover, Log depth, Waiting time, Absolute spread, Log spread, Effective spread, Quote slope, Log quote slope, Two types of PCA To check the commonality across measures To check the time variation across liquidities within a given day

38 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 35 Commonality among liquidity measures Commonality across measures Table 4: Principal components of intraday liquidity proxies Eigen Value Proportion Cumulative Eigen Vectors

39 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 36 Commonality among liquidity measures Commonality across measures: Some Observations Only very weak commonality across measures, with the very first eigen value explaining only 18% of the total variation. No specific common measure had a larger impact on liquidity in the year Kempf and Mayston (2006): reasons for an evidence of weak commonality 1 use of inadequate liquidity proxies 2 best quotes are noisy and subject to idiosyncratic variation, because of fierce competition amongst liquidity suppliers, 3 could be due time varying pattern in commonalities across measures

40 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 37 Commonality among liquidity measures Commonality variation within a day First Eigenvalue :00 11:00 12:00 13:00 14:00 15:00 Time of Day Turnover Waiting Time Figure 1.9 Intraday behaviour of First Eigenvalue of Turnover and Waiting Time.

41 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 38 Commonality among liquidity measures Commonality variation within a day First Eigenvalue :00 11:00 12:00 13:00 14:00 15:00 Time of Day Absolute spread Effective Spread Log Spread Figure 1.10 Intraday behaviour of First Eigenvalue of Absolute spread, Log spread and Effective spread.

42 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 39 Commonality among liquidity measures Commonality variation within a day First Eigenvalue :00 11:00 12:00 13:00 14:00 15:00 Time of Day Log Depth Log Quote Slope Quote Slope Figure 1.11 Intraday behaviour of First Eigenvalue of Log Depth, Quote slope and Log Quote slope.

43 Intraday Liquidity Patterns in Indian Stock Market Empirical Results 40 Commonality among liquidity measures Commonality variation within a day: Some Observations No undue variations in commonality within the day, except for waiting time. The commonality remains generally flat throughout the day with a tendency to peak towards the end of the day. Not accounting for time varying pattern may not be the reason for weak commonality across liquidity measures. Commonality may not be a general attribute of financial markets.

44 Intraday Liquidity Patterns in Indian Stock Market Conclusions 41 Conclusions Liquidity measures confirming to the U-shaped pattern, which is a stylized fact among the quote driven or hybrid markets. Generally high and significant correlations within each group. Evidence of only weak commonality amongst various measues. Only weak evidence to suggest that such a commonality in liquidity has to be a priced risk.