Title: Liquidity tail risk in the wake of the financial crisis: Evidence from the U.S. stock market
Authors: Debbie Dupuis - HEC Montreal (Canada) [presenting]
Luca Trapin - University of Bologna (Italy)
Abstract: Since the last financial crisis, market participants have perceived a deterioration in market liquidity as a consequence of the tightening regulatory constraints. Inspecting common liquidity metrics, recent research in finance however does not find any substantial reduction in liquidity compared to the pre-crisis levels. Going beyond the level of liquidity, the aim is to investigate liquidity tail risk, studying possible changes in the likelihood of extreme illiquidity events over the post-crisis period. To do that, we define a novel state-space extreme value model and build a robust score-driven filter and smoother of the latent states. Fitting the model to several highly liquid stocks in the S\&P500 reveals that tail liquidity risk has increased in recent years. While we find insufficient evidence that this increase is solely attributable to a structural change in the dynamics of liquidity provision due to the post-crisis regulatory restructuring, the substantial increase in liquidity tail risk should prompt policymakers and market participants to take mitigating action.