Abstract

This paper investigates the liquidity spillovers between 56 stock markets for the period from January 2, 2007 to August 12, 2022. Using high-dimensional data, we estimated a LASSO-VAR model to calculate liquidity spillovers across the diverse stock markets. Our results reveal that stock markets are significantly connected through the liquidity channel. This connectedness is mainly explained by variations in the entire system, which are dynamic and intensify during the periods of crisis or financial stress. Developed markets such as the United Kingdom, United States, Canada, and the Eurozone are the main transmitters of liquidity spillovers. However, emerging markets such as Brazil, Mexico, South Africa, Romania, and Bulgaria are also important transmitters of liquidity shocks and facilitate their propagation. Other emerging markets are the least vulnerable to shocks of this nature, and offer the best opportunities to diversify portfolios internationally and contain financial contagion. These results are relevant for investors, market makers, and regulators due to their implications for investment decision-making, as well as for financial regulation design.