Stock and Bond Market Liquidity:The Spillover Effects

This paper establishes liquidity linkage between stock and government bond markets in China.There is a lead-lag relationship between the liquidity of the two markets and bi-drectional Granger causality.The effect of stock liquidity on bond liquidity is consistent with flight-to-quality or flight-to-liquidity episodes.Changes in the macro environment impact the liquidity of two markets significantly.More importantly,the shocks mostly are transferred to one of the markets through the other market,which acts as a channel.The paper provides important evidence of liquidity integration between stock and bond markets.