Essays on stock market liquidity: Stock market cash flows and returns, and exchange-traded funds

This dissertation consists of two essays concerning stock market liquidity. The first essay attempts to explain stock returns using the liquidity argument; specially, I test if activities that affect cash flows into stock market can explain stock returns. The general results are strongly consistent with the liquidity argument. I find that high concurrent equity fund flows, high current margin debt, high stock buyback and low equity offerings in previous months strongly suggest high current stock market returns. That is, these liquidity-changing activities have important impacts on the market, although not all have immediate impacts. The second essay examines the bid-ask spreads and holding periods of Exchange Traded Funds (ETFs). Regression analysis indicates that average percentage bid-ask spreads are decreasing function of trading volume, market value and closing price for ETFs. The regression results also support the clientele effect that holding periods have significantly positive relation with bid-ask spreads for ETFs. I find that broad-based ETFs have lower transaction cost than sector ETFs because of diversification effect. I also find that ETFs have lower asymmetric information (compared to individual stocks) as suggested by the lower bid-ask spreads for ETFs. This study is the first to examine the bid-ask spreads of ETFs and the first to document evidence that the degree of diversification influences spreads.