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Liquidity Providing: Study on liquidity providing in the Nordic stock markets

Karlsson, Julius Bengt Leif LU and Malmström, Carl Victor LU (2022) NEKN02 20221
Department of Economics
Abstract
Risk and return go hand in hand, and one way for a firm to mitigate existing and potential investors' risk in a stock is to employ a financial service; liquidity providing. The value of liquidity provision has become relevant as market uncertainties and shocks in the market create disturbances. In addition, the market environment has changed with regulation and the increase of high-frequency traders. Investors evaluate risk in firms, and one apparent risk is liquidity risk caused by the stock itself. With risk comes higher return demands and thus the threshold for an investor to invest in a stock becomes higher.
This study examines liquidity providers' effect on stock performance, independent from the announcement date, in Nasdaq Nordic... (More)
Risk and return go hand in hand, and one way for a firm to mitigate existing and potential investors' risk in a stock is to employ a financial service; liquidity providing. The value of liquidity provision has become relevant as market uncertainties and shocks in the market create disturbances. In addition, the market environment has changed with regulation and the increase of high-frequency traders. Investors evaluate risk in firms, and one apparent risk is liquidity risk caused by the stock itself. With risk comes higher return demands and thus the threshold for an investor to invest in a stock becomes higher.
This study examines liquidity providers' effect on stock performance, independent from the announcement date, in Nasdaq Nordic markets. I.e., we examine the period when liquidity provision is ongoing. Our theoretical foundation lies in the propensity score matching in which we estimate the effect of liquidity provision by examining a sample derived from Nasdaq Nordic firms. We compare samples of companies with liquidity providers and without. In the study, we find statistical significance for variables spread, volatility, turnover, and market cap. In our sample including all firms, we find an average decrease in spread by 11.6% and an increase in turnover by 13.3%. The study finds positive liquidity effects which stimulate a better price discovery in terms of volatility decreasing by 29% and market cap increasing by 21%. The results of this thesis show that there is a positive liquidity provision effect in the Nordic market during the period after the announcement. (Less)
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author
Karlsson, Julius Bengt Leif LU and Malmström, Carl Victor LU
supervisor
organization
course
NEKN02 20221
year
type
H1 - Master's Degree (One Year)
subject
keywords
Liquidity Providing, Nordic Stock Exchange, Financial Service, Market Maker
language
English
id
9099715
date added to LUP
2022-10-10 09:36:29
date last changed
2022-10-10 09:36:29
@misc{9099715,
  abstract     = {{Risk and return go hand in hand, and one way for a firm to mitigate existing and potential investors' risk in a stock is to employ a financial service; liquidity providing. The value of liquidity provision has become relevant as market uncertainties and shocks in the market create disturbances. In addition, the market environment has changed with regulation and the increase of high-frequency traders. Investors evaluate risk in firms, and one apparent risk is liquidity risk caused by the stock itself. With risk comes higher return demands and thus the threshold for an investor to invest in a stock becomes higher. 
This study examines liquidity providers' effect on stock performance, independent from the announcement date, in Nasdaq Nordic markets. I.e., we examine the period when liquidity provision is ongoing. Our theoretical foundation lies in the propensity score matching in which we estimate the effect of liquidity provision by examining a sample derived from Nasdaq Nordic firms. We compare samples of companies with liquidity providers and without. In the study, we find statistical significance for variables spread, volatility, turnover, and market cap. In our sample including all firms, we find an average decrease in spread by 11.6% and an increase in turnover by 13.3%. The study finds positive liquidity effects which stimulate a better price discovery in terms of volatility decreasing by 29% and market cap increasing by 21%. The results of this thesis show that there is a positive liquidity provision effect in the Nordic market during the period after the announcement.}},
  author       = {{Karlsson, Julius Bengt Leif and Malmström, Carl Victor}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Liquidity Providing: Study on liquidity providing in the Nordic stock markets}},
  year         = {{2022}},
}