Analysis On Correlation Between Stock Market Liquidity And Bond Market Liquidity

The stock market and the bond market are the main components of the capital market.When the capital flows freely and the information is fully shared,the situation of one market tends to influence another market.As one of the core indicators of the two markets,liquidity has been the attention of scholars at home and abroad.In addition to turnover,kinds of liquidity indexes havealso been more and more appealing for the stock market and bond market liquidity research.In this paper,we defined the ratio of theabsolutevalueofreturn to volume as the index of illiquidity,which means that the smaller the transaction volume,the larger the price change,and the worse the market liquidity.This paper firstly analyzes the relationship between the stock market and the bond market from the theoretical level,including the relationship between the market liquidity and its return and volatility.Secondly,this paper discusses the relationship between the stock market and the liquidity of the bond market from the micro and macro levels.Thirdly,this paper discusses the internal mechanism of the external performance of liquidity-relationship between the stock market and the bond market;Finally,through empirical testing,this paper construct the VAR(2)model by using the index return and the volatility of the stock market and the bond market,and combining with the stock market and the illiquidity index of the short,medium and long term bond market.,so it is withthe Smooth and ADF test,Granger causality test and Impulse response function.Using Granger causality test,this paper finds that there exists a lead-lag relationship between the illiquidityof the stock market and the bond market.Based on the impulse response function analysis,this paper finds that:1.When the liquidity of short,medium and long term bond market worse,namely there is a positive impact to the illiquidity index,the illiquidity index of stock markethas a negative reaction,as reflected in the stock market liquidity enhancement,and when facing liquidity shocks from short-term bond market,the stock market liquidity enhancement effect was the strongest.2.When the liquidity of stock market worse,namely there is a positive impact to the illiquidity index,the illiquidity index of short,medium and long term bond market decreased to reflect the overall bond market liquidity enhancement,and the enhancement effect of liquidity in the short-term bond market reaction was the strongest.3.Based on the two conclusions above,we can see that,in general,substitution effect between the liquidity of China's stock market and the liquidity of short-term bond market are more obvious.This shows that investors in China's stock market are short-term,speculative investors.4.With the increase of stock market returns,the liquidity of stock market increased,but the liquidity of short,medium and long-term bond market index flow will rise.This means that the stock market boom will weaken the bond market liquidity.But the short-term bonds will experience a liquidity enhancement stagefirst,this may because of that the stock market boom may often affected by some short-term positive shocks,the short-term impact is also brought liquidity of the short-term bond market to enhance instantaneously.5.The increase of bond market return will improve the short-term and long-term bond market and the stock market liquidity,but the medium-term bond market liquidity will be worse.This shows that the prosperity of the bond market is more due to the fundamental factors that lead to the prosperity of investment for various periods.At this time,the substitution effect of the stock market liquidity and the medium-term bond market liquidity dominating,indicating that the stock market investors are more rational.These results are consistent with flight-to-liquidity and flight-to-quality episodes and it also reflects the close relationship between the stock market and the liquidity of the bond market in different situation.Our study is of great importance to investors and market regulators,not only to help investors optimize the allocation of resources,increase investment income,but also provide a more clear relationship between the stock market and bond marketfor market regulators and is useful for the relevant market Policy formulation.