Commonality in liquidity

Traditionally and understandably, the microscope of market microstructure h as focused on attributes of single assets. Little theoretical attention and virtually no empirical work has been devoted to common determinants of liq uidity nor to their empirical manifestation, correlated movements in liquid ity. But a wider-angle lens exposes an imposing image of commonality. Quote d spreads, quoted depth, and effective spreads co-move with market- and ind ustry-wide liquidity. After controlling for well-known individual liquidity determinants, such as volatility, volume, and price, common influences rem ain significant and material. Recognizing the existence of commonality is a key to uncovering some suggestive evidence that inventory risks and asymme tric information both affect intertemporal changes in liquidity. (C) 2000 E lsevier Science S.A. All rights reserved. JEL classification: G23; D82.