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Liquidity of financial markets: a review

Abhinava Tripathi (Department of Finance and Accounting, Indian Institute of Management Lucknow, Lucknow, India)
Alok Dixit (Department of Finance and Accounting, Indian Institute of Management Lucknow, Lucknow, India)
Vipul (Department of Finance and Accounting, Indian Institute of Management Lucknow, Lucknow, India)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 4 July 2019

Abstract

Purpose

The purpose of this study is to systematically review and analyze the literature in the area of liquidity of financial markets. The study summarizes the key findings and approaches and highlights the research gaps in the extant literature.

Design/methodology/approach

A variety of reputed databases are utilized to select 100 research papers, from a large pool of nearly 3,000 research papers spanning between 1972 and 2018 using systematic literature review methodology. The selected research papers are organized to provide an in-depth analysis and an account of the ongoing research in the area of liquidity. The study uses bibliometric network visualization and word-cloud analyses to compile and analyze the literature.

Findings

The study summarizes the recent approaches in the liquidity research on aspects such as methodologies followed, variables applied, sub-areas covered, and the types of economies and markets covered. The article shows that the literature on liquidity in the emerging markets (e.g. China and India) is deficient. Overall, the following research areas related to liquidity need further exploration in the context of emerging markets: liquidity beyond the best bid-ask quotes, intraday return predictability using microstructure variables (e.g. order imbalances), impact of algorithmic-trading and volatility of liquidity.

Originality/value

To the best of authors’ knowledge, in the recent past, a detailed account of the literature on liquidity has not been published. It provides a comprehensive collection and classification of the literature on the liquidity of financial markets. This would be helpful to the future researchers, academics and practitioners in the area of financial markets.

Keywords

Citation

Tripathi, A., Dixit, A. and , V. (2019), "Liquidity of financial markets: a review", Studies in Economics and Finance, Vol. 37 No. 2, pp. 201-227. https://doi.org/10.1108/SEF-10-2018-0319

Publisher

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Emerald Publishing Limited

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