Jiayuan Chen

Jiayuan Chen

A Market Microstructure Study on Liquidity

Supervisor: Professor Cal Muckley

External Examiner: Dr Michael Dowling, ESC Rennes


This thesis is comprised of three empirical studies on market microstructure pertaining to nascent market evolution, corporate payout policies and costs of debt. 

In Chapter 1, “Is information assimilated at announcements in the European Carbon Market?”, I examine the high frequency information assimilation (in price, trading activity and liquidity) at scheduled macroeconomic and verified emissions announcements in the European carbon futures market. The findings show evidence of emerging stylised high frequency information assimilation regularities in this market.

In Chapter 2, “Does stock repurchase affect liquidity?”, I discuss the liquidity impact of share repurchases in the U.S. stock market. Using actual repurchase data, I address the potential endogeneity with propensity score matching - difference in differences identification method. The results suggest that stock repurchases reduce market liquidity, possibly through the channel of increased inventory risk. 

In Chapter 3, “Does stock market illiquidity influence the cost of borrowing?”, I show that firms with illiquid stock have higher spreads in the syndicated loan market, and they also receive diminished benefit from past lending relationships. A rationale is that stock market illiquidity reduces the bargaining power of corporate borrowers in the loan spreads negotiating process, as it raises the cost of the alternative – equity financing. These findings, thus, provide evidence that relative bargaining power plays a systematic role in determining syndicated loan spreads. 

In sum, this thesis narrows the gaps in the extant literature regarding market microstructure development in nascent market and the role of liquidity in corporate finance. It also contributes to the debates on whether relationship lending increases or reduces borrowing cost, and whether share repurchases increase or reduce market liquidity. 

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