Market liquidity and trading activity

Previous studies of liquidity span short time periods and focus on the indi vidual security. In contrast, we study aggregate market spreads, depths, an d trading activity for U.S. equities over an extended time sample. Daily ch anges in market averages of liquidity and trading activity are highly volat ile and negatively serially dependent. Liquidity plummets significantly in down markets. Recent market volatility induces a decrease in trading activi ty and spreads. There are strong day-of-the-week effects; Fridays accompany a significant decrease in trading activity and liquidity, while Tuesdays d isplay the opposite pattern. Long- and short-term interest rates influence liquidity. Depth and trading activity increase just prior to major macroeco nomic announcements.