Interplay of Uncertainty, Returns and Liquidity

In this paper, I examine both ask and bid liquidity using the pannel data for 5 years (2008-2012) with ~730 companies each year. The main purpose of this work is to understand how the liquidity is related to the different kinds of risks as well as to the overall shape of the implied distribution. I consider the market risk, measured by VIX, the specific risk, measured by the implied volatility. At the same time, I use the implied skewness and implied kurtosis, which are also related to the risk. Besides, I control for the variables which, according to the empirical papers, are relevant. That is return, spread and volume. The main hypotheses are: VIX and volatility both affect the liquidity negatively. At the same time, the former plays a more import role because it includes the broader and more significant set of an information. We also expect that skewness depends on the liquidity negatively, because it represents the risk through the degree of asymmetry. The relationship between the kurtosis and liquidity is less straightforward because the growth of it implies the increased probability of both extremely positive and extremely negative events. Yet, we believe that skewness already accounts for the bad states and thus, kurtosis should have positive interconnection with the liquidity.