Impact on Liquidity of the stock market due to COVID-19 and BREXIT

Student thesis: Doctoral Thesis


In my thesis, I study the impact on liquidity of the capital markets due to COVID-19 and BREXIT. In my first empirical chapter, taking a sample of the indices of the USA, UK, China, Brazil, Germany, and Spain, I study how the pandemic has impacted the liquidity of the capital markets of the mentioned countries. COVID-19 has been declared as a pandemic by the World Health Organisation (WHO) on March 11, 2020. I study a 60-day pre and post period of March 11, 2020 to capture the liquidity effects. For a short-term analysis, I use the relative spread and for the long-term analysis, I use the price impact ratios of Amihud (2002) and Florackis et al. (2011). I report that in the short-term, the pandemic has decreased the liquidity of the capital markets. In the long run, there has been a liquidity effect only in China. In order to further analyse what caused the deterioration, I decompose the effective spread and discover that the information asymmetry has played a role in the liquidity effect of the capital markets. However, the information asymmetry effect cannot be found on the capital markets of China.

For the second empirical chapter, I study the impact of the pandemic, COVID-19, on the liquidity of the European Tourism Industry by analysing forty-nine companies from the FTSE ALL Share Index, EURONEXT 100, and IBEX 35 indices. As the WHO declared COVID-19 as a pandemic on March 11, 2020, hence, I develop a 60 days pre and post period around March 11, 2020, to capture the short-term and long-term effects of COVID-19 on the European Tourism Industry. For a short-term measure, I use the relative spread and for the long-term measure, I use the price impact ratios of Amihud (2002) and Florackis et al. (2011). I report that both in the short and long terms, the liquidity of the European Tourism Industry has decreased.

For the third empirical chapter, I study twenty-four events from the BREXIT referendum until the transition period to capture how BREXIT has impacted the liquidity of the FTSE 100 index. I study a period of 10 days pre and post around each of the twenty-four events. Thus, I develop an event-study methodology and compute the quoted, relative, and effective spreads for each of the events. I discover that during the period, there exhibits positive and significant spreads which tend to decrease as the referendum is absorbed and again tend to rise near the transition period.

My research supports the information cost/liquidity hypothesis. Whenever noise or events occur, one part of the market participants become aware of superior information than that of the other segment of traders. Hence information asymmetry appears in the financial markets. Thus the market participants, also known as specialists, who do not have access to the superior information require premium for accommodating information and taking positions against informed investors/traders. The specialists, then in turn, increase the bid-ask spread as a liquidity premium. As a result, the market also signals a fall in the price impact ratios. Overall, the liquidity of the financial markets decreases.

My research shows that COVID-19 and BREXIT have created information asymmetry in the financial markets. I report that these two events have significant effect on the liquidity of the capital markets. My research can hence be used as a guide to determine portfolio organizing in times of the pandemic or political events and also to stabilise the long-term effects of the noises. Moreover, it can provide advice on the policy framework in times of the market events.
Date of AwardSept 2023
Original languageEnglish
Awarding Institution
  • University of Brighton
SupervisorAndros Gregoriou (Supervisor) & Rob Hayward (Supervisor)

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