Closer View at the Stock Market Liquidity: A Literature Review

Abstract

Liquidity is said to be the lifeblood of stock markets. It has prominent implications for traders, regulators, stock exchanges and the listed firms. In recent years a huge amount of literature has emerged that deals with liquidity. This article classifies and organises the literature and provides a critical review of the frameworks currently available for modelling liquidity and its macroeconomic and firm specific drivers. Commonality and intraday behaviour of liquidity in various markets is discussed under the umbrella of market microstructures.  Subsequently, liquidity risk as a factor in Asset pricing is analysed taking various models in to consideration. Finally, the study reviewed the impact of liquidity on corporate finance decisions viz. dividends, firm valuation, stock split, capital structure etc.