A Work Project, presented as part of the requirements for the Award of a Master’s

Degree in Finance from the NOVA School of Business and Economics.

The impact of credit conditions in market liquidity – a case for

European stock markets

Annex

Miguel Bordadágua Vieira de Brito, nº 865

A Directed Research Project carried out under the supervision of:

Professor João Pedro Pereira

January 2016

I. Core Model – Eurozone

Table 1 – Sources of Endogenous and Exogenous Variables

Variable Inputs Source

TO

Number of shares traded (PX_VOLUME) Bloomberg

Number of shares outstanding

(EQY_SH_OUT) Bloomberg

AMIHUD Last Price (PX_LAST) Bloomberg

Traded volume in Euro (TURNOVER) Bloomberg

BID_ASK

Bid Price (PX_BID) Bloomberg

Ask Price (PX_ASK) Bloomberg

Last Price (PX_LAST) Bloomberg

TED_EZ

Euribor 3-month ECB Data Warehouse

EUR Germany Sovereign (FMC 910) Zero

Coupon Yield 3 month (F91003M Index) Bloomberg

dCUR_DEP

Currency in Circulation ECB Data Warehouse

Overnight Deposits ECB Data Warehouse

Deposits with agreed maturity, up to 2 years ECB Data Warehouse

Deposits redeemable at notice, up to 3

months ECB Data Warehouse

Deposits with agreed maturity up to 2 years

and redeemable at notice up to 3 months ECB Data Warehouse

RES_DEP*

ECB Credit Institutions Current Account

(EULPCICA Index) Bloomberg

ECB Balance Sheet Deposit Facility

(EBBSDEPF Index) Bloomberg

logNCORE

MFIs Debt Securities Held ECB Data Warehouse

MFIs Money Market Funds Shares/ Units ECB Data Warehouse

MFIs Debt Securities Issued ECB Data Warehouse

MFIs Remaining Liabilities ECB Data Warehouse

MFIs External Liabilities, Extra Euro Area ECB Data Warehouse

MRET Index Last Price (PX_LAST) Bloomberg

MSTDEV Index Last Price (PX_LAST) Bloomberg

dIR Euro Area Harmonized Index of Consumer

Prices, Annual rate of change Eurostat

IPI Euro Area Industrial Production Index

(excluding construction) – 2010 = 100 Eurostat

* Included the same aggregates of deposits of dCUR_DEP

Table 2 – List of Current Index Composition

AEX (25 Members):

DAX (30 Members):

Ticker Name

Ticker Name

1 KPN NA Equity Koninklijke KPN NV

1 ALV GY Equity Allianz SE

2 AGN NA Equity Aegon NV

2 RWE GY Equity RWE AG

3 ASML NA Equity ASML Holding NV

3 BAYN GY Equity Bayer AG

4 PHIA NA Equity Koninklijke Philips NV

4 BMW GY Equity Bayerische Motoren Werke AG

5 NN NA Equity* NN Group NV

5 CBK GY Equity Commerzbank AG

6 DL NA Equity* Delta Lloyd NV

6 DBK GY Equity Deutsche Bank AG

7 REN NA Equity RELX NV

7 BAS GY Equity BASF SE

8 WKL NA Equity Wolters Kluwer NV

8 HEN3 GY Equity Henkel AG & Co KGaA

9 AH NA Equity Koninklijke Ahold NV

9 LIN GY Equity Linde AG

10 RDSA NA Equity Royal Dutch Shell PLC

10 LHA GY Equity Deutsche Lufthansa AG

11 UNA NA Equity Unilever NV

11 SIE GY Equity Siemens AG

12 DSM NA Equity Koninklijke DSM NV

12 VOW3 GY Equity Volkswagen AG

13 GTO NA Equity* Gemalto NV

13 EOAN GY Equity E.ON SE

14 INGA NA Equity ING Groep NV

14 BEI GY Equity Beiersdorf AG

15 BOKA NA Equity Boskalis Westminster

15 HEI GY Equity HeidelbergCement AG

16 RAND NA Equity Randstad Holding NV

16 SDF GY Equity K+S AG

17 ATC NA Equity* Altice NV

17 MUV2 GY Equity Munich Re

18 AALB NA Equity Aalberts Industries NV

18 FRE GY Equity* Fresenius SE & Co KGaA

19 MT NA Equity ArcelorMittal

19 SAP GY Equity SAP SE

20 VPK NA Equity Koninklijke Vopak NV

20 MRK GY Equity Merck KGaA

21 AKZA NA Equity* Akzo Nobel NV

21 ADS GY Equity adidas AG

22 HEIA NA Equity* Heineken NV

22 DTE GY Equity Deutsche Telekom AG

23 TNTE NA Equity* TNT Express NV

23 DPW GY Equity Deutsche Post AG

24 UL NA Equity Unibail-Rodamco SE

24 FME GY Equity Fresenius Medical Care AG & Co KGaA

25 OCI NA Equity OCI NV

25 DAI GY Equity Daimler AG

26 TKA GY Equity ThyssenKrupp AG

27 IFX GY Equity Infineon Technologies AG

28 DB1 GY Equity Deutsche Boerse AG

29 VNA GY Equity* Vonovia SE

30 CON GY Equity Continental AG

* Stock was not included in the sample due to insufficient or anomalous data

CAC 40 (40 Members):

FTSE MIB (40 Members):

Ticker Name

Ticker Name

1 OR FP Equity L'Oreal SA

1 A2A IM Equity A2A S.p.A.

2 DG FP Equity Vinci SA

2 ATL IM Equity Atlantia SpA

3 ALU FP Equity Alcatel-Lucent

3 AZM IM Equity* Azimut Holding Spa

4 FP FP Equity TOTAL SA

4 BMPS IM Equity Banca Monte dei Paschi di Siena S.p.A.

5 AI FP Equity Air Liquide SA

5 BP IM Equity* Banco Popolare Societa Cooperativa Scarl

6 CS FP Equity AXA SA

6 BPE IM Equity

Banca popolare dell'Emilia Romagna, Società

cooperativa.

7 BNP FP Equity BNP Paribas SA

7 BZU IM Equity Buzzi Unicem SpA

8 BN FP Equity Danone SA

8 CNHI IM Equity* CNH Industrial N.V.

9 CAP FP Equity Cap Gemini SA

9 CPR IM Equity Davide Campari - Milano SpA

10 CA FP Equity Carrefour SA

10 EGPW IM

Equity* Enel Green Power S.p.A.

11 AC FP Equity Accor SA

11 ENEL IM Equity Enel SpA

12 SGO FP Equity Cie de Saint-Gobain

12 ENI IM Equity Eni SpA

13 VIV FP Equity Vivendi SA

13 EXO IM Equity* Exor S.p.A.

14 EI FP Equity Essilor International SA

14 FCA IM Equity* Fiat Chrysler Automobiles N.V.

15 MC FP Equity LVMH Moet Hennessy Louis

Vuitton SE 15 FNC IM Equity Finmeccanica SpA

16 ML FP Equity Cie Generale des

Etablissements Michelin 16 G IM Equity Assicurazioni Generali S.p.A.

17 KER FP Equity Kering

17 ISP IM Equity Intesa Sanpaolo S.p.A.

18 UG FP Equity Peugeot SA

18 LUX IM Equity Luxottica Group SpA

19 PUB FP Equity Publicis Groupe SA

19 MB IM Equity

Mediobanca Banca di Credito Finanziario

S.p.A.

20 RNO FP Equity Renault SA

20 MED IM Equity Mediolanum S.p.A.

21 SAF FP Equity Safran SA

21 MONC IM

Equity* MONCLER

22 FR FP Equity Valeo SA

22 MS IM Equity Mediaset SpA

23 SOLB BB Equity Solvay SA

23 PC IM Equity Pirelli & C. SpA

24 TEC FP Equity Technip SA

24 PMI IM Equity Banca Popolare di Milano Scarl

25 ENGI FP Equity* Engie SA

25 PRY IM Equity* Prysmian S.p.A.

26 EDF FP Equity* Electricite de France SA

26 SFER IM Equity* Salvatore Ferragamo SpA

27 ORA FP Equity Orange SA

27 SPM IM Equity Saipem SpA

28 MT NA Equity* ArcelorMittal

28 SRG IM Equity Snam S.p.A.

29 EN FP Equity Bouygues SA

29 STM IM Equity STMicroelectronics NV

30 ALO FP Equity Alstom SA

30 STS IM Equity* Ansaldo STS SpA

31 VIE FP Equity Veolia Environnement SA

31 TEN IM Equity* Tenaris S.A.

32 SAN FP Equity Sanofi

32 TIT IM Equity Telecom Italia S.p.A.

33 GLE FP Equity Societe Generale SA

33 TOD IM Equity Tod's SpA

34 SU FP Equity Schneider Electric SE

34 TRN IM Equity* TERNA - Rete Elettrica Nazionale Società

per Azioni

* Stock was not included in the sample due to insufficient or anomalous data

Ticker Name Ticker Name

35 LHN FP

Equity* LafargeHolcim Ltd 35 UBI IM Equity* Unione di Banche Italiane Scpa

36 AIR FP Equity Airbus Group SE 36 UCG IM Equity UniCredit S.p.A.

37 LR FP Equity* Legrand SA

37 UNI IM Equity Unipol Gruppo Finanziario S.p.A.

38 ACA FP Equity Credit Agricole SA

38 US IM Equity* UnipolSai Assicurazioni S.p.A.

39 RI FP Equity Pernod Ricard SA

39 WDF IM

Equity* World Duty Free S.p.A.

40 UL NA Equity* Unibail-Rodamco SE

40 YNAP IM

Equity* YOOX NETAPORT

* Stock was not included in the sample due to insufficient or anomalous data

Table 3 – Eigenvalue Condition for Stability Test

Eigenvalue Modulus

.9710492 .971049

.9244298 + .1150402i .93156

.9244298 - .1150402i .93156

.8573963 + .0176548i .857578

.8573963 - .0176548i .857578

-.5573717 + .5434439i .778456

-.5573717 - .5434439i .778456

.3670674 + .6740792i .767542

.3670674 - .6740792i .767542

.6621561 + .3684825i .75778

.6621561 - .3684825i .75778

-.2533921 + .6703983i .716688

-.2533921 - .6703983i .716688

.0530029 + .6958666i .697882

.0530029 - .6958666i .697882

-.6247098 + .188423i .652507

-.6247098 - .188423i .652507

.1429587 + .633995i .649913

.1429587 - .633995i .649913

-.5446347 + .3070601i .62523

-.5446347 - .3070601i .62523

-.5317061 .531706

.2334185 + .4747528i .529032

.2334185 - .4747528i .529032

.04926243 + .480974i .48349

.04926243 - .480974i .48349

.3355127 + .08015326i .344954

.3355127 - .08015326i .344954

All the eigenvalues lie inside the unit circle.

VAR satisfies stability condition.

Impulse Response Functions

Graph 1 – Response of AMIHUD to

TED_EZ

Graph 2 – Response of BID_ASK to

dCUR_DEP

Graph 3 – Response of TO to RES_DEP Graph 4 – Response of AMIHUD to

RES_DEP

Graph 5 – Response of BID_ASK to logNCORE

Legend: Orthogonalized IRF 95% Confidence Interval Bands

II. Robustness Check Model – UK

Table 4 – Sources of Endogenous and Exogenous Variables

Variable Inputs Source

TO

Number of shares traded (PX_VOLUME) Bloomberg

Number of shares outstanding

(EQY_SH_OUT) Bloomberg

AMIHUD Last Price (PX_LAST) Bloomberg

Traded volume in Euro (TURNOVER) Bloomberg

BID_ASK

Bid Price (PX_BID) Bloomberg

Ask Price (PX_ASK) Bloomberg

Last Price (PX_LAST) Bloomberg

TED_EZ

Pound Sterling ICE Libor 3-month

(BP0003M Index) Bloomberg

United Kingdom Zero Coupon Yield 3-

month Treasury Bill (I02203M Index) Bloomberg

dCUR_DEP

Currency in Circulation Bank of England

Overnight Deposits Bank of England

Deposits with agreed maturity, up to 2 years Bank of England

Deposits redeemable at notice, up to 3

months Bank of England

RES_DEP* MFI Balances at the Central Bank Bank of England

Cash Ratio Deposits Bank of England

logNCORE

MFIs Repurchase Agreements Bank of England

MFIs Money Market Funds Shares/ Units Bank of England

MFIs Certificates of Deposit and Paper

Issued Bank of England

MFIs Securitized Loans Bank of England

MRET Index Last Price (PX_LAST) Bloomberg

MSTDEV Index Last Price (PX_LAST) Bloomberg

dIR Euro Area Harmonized Index of Consumer

Prices, Annual rate of change Eurostat

IPI Euro Area Industrial Production Index

(excluding construction) – 2010 = 100 Eurostat

* Included the same aggregates of deposits of dCUR_DEP

Table 5 – List of Current Index Composition

FTSE 100 (101 members):

Ticker Name

Ticker Name

1 HSBA LN Equity HSBC Holdings PLC

36 NXT LN Equity Next PLC

2 BATS LN Equity British American Tobacco PLC

37 SKY LN Equity Sky PLC

3 BP/ LN Equity BP PLC

38 GLEN LN Equity* Glencore PLC

4 GSK LN Equity GlaxoSmithKline PLC

39 CNA LN Equity Centrica PLC

5 RDSA LN Equity* Royal Dutch Shell PLC

40 IAG LN Equity International Consolidated

Airlines Grou

6 VOD LN Equity Vodafone Group PLC

41 RBS LN Equity Royal Bank of Scotland Group

PLC

7 AZN LN Equity AstraZeneca PLC

42 ITV LN Equity* ITV PLC

8 DGE LN Equity Diageo PLC

43 RR/ LN Equity Rolls-Royce Holdings PLC

9 LLOY LN Equity Lloyds Banking Group PLC

44 SN/ LN Equity Smith & Nephew PLC

10 BT/A LN Equity BT Group PLC

45 OML LN Equity Old Mutual PLC

11 RDSB LN Equity Royal Dutch Shell PLC

46 LAND LN Equity Land Securities Group PLC

12 RB/ LN Equity Reckitt Benckiser Group PLC

47 WOS LN Equity Wolseley PLC

13 BARC LN Equity Barclays PLC

48 BLND LN Equity British Land Co PLC/The

14 PRU LN Equity Prudential PLC

49 MKS LN Equity Marks & Spencer Group PLC

15 SAB LN Equity SABMiller PLC

50 WTB LN Equity Whitbread PLC

16 NG/ LN Equity National Grid PLC

51 CPI LN Equity Capita PLC

17 BG/ LN Equity BG Group PLC

52 KGF LN Equity Kingfisher PLC

18 IMT LN Equity Imperial Tobacco Group PLC

53 LSE LN Equity London Stock Exchange Group

PLC

19 ULVR LN Equity Unilever PLC

54 SL/ LN Equity* Standard Life PLC

20 RIO LN Equity Rio Tinto PLC

55 PSON LN Equity Pearson PLC

21 SHP LN Equity Shire PLC

56 UU/ LN Equity United Utilities Group PLC

22 AV/ LN Equity Aviva PLC

57 BNZL LN Equity Bunzl PLC

23 WPP LN Equity WPP PLC

58 CCL LN Equity Carnival PLC

24 BLT LN Equity BHP Billiton PLC

59 TW/ LN Equity Taylor Wimpey PLC

25 CPG LN Equity Compass Group PLC

60 SGE LN Equity Sage Group PLC/The

26 LGEN LN Equity Legal & General Group PLC

61 AAL LN Equity Anglo American PLC

27 BA/ LN Equity BAE Systems PLC

62 IHG LN Equity* InterContinental Hotels Group

PLC

28 ARM LN Equity ARM Holdings PLC

63 BDEV LN Equity Barratt Developments PLC

29 CRH LN Equity CRH PLC

64 PSN LN Equity Persimmon PLC

30 SSE LN Equity SSE PLC

65 BRBY LN Equity* Burberry Group PLC

31 TSCO LN Equity Tesco PLC

66 DLG LN Equity* Direct Line Insurance Group

PLC

32 REL LN Equity RELX PLC

67 MNDI LN Equity* Mondi PLC

33 STAN LN Equity Standard Chartered PLC

68 TUI LN Equity* TUI AG

34 ABF LN Equity Associated British Foods PLC

69 SVT LN Equity Severn Trent PLC

35 EXPN LN Equity* Experian PLC

70 AHT LN Equity Ashtead Group PLC

* Stock was not included in the sample due to insufficient or anomalous data

Ticker Name

Ticker Name

71 GKN LN Equity GKN PLC

87 GFS LN Equity* G4S PLC

72 JMAT LN Equity Johnson Matthey PLC

88 SBRY LN Equity J Sainsbury PLC

73 STJ LN Equity St James's Place PLC

89 MRW LN Equity Wm Morrison Supermarkets PLC

74 BAB LN Equity Babcock International Group PLC

90 ADN LN Equity Aberdeen Asset Management PLC

75 TPK LN Equity Travis Perkins PLC

91 SDR LN Equity Schroders PLC

76 ISAT LN Equity* Inmarsat PLC

92 HL/ LN Equity* Hargreaves Lansdown PLC

77 III LN Equity 3i Group PLC

93 ADM LN Equity* Admiral Group PLC

78 HMSO LN Equity Hammerson PLC

94 CCH LN Equity* Coca-Cola HBC AG

79 DC/ LN Equity* Dixons Carphone PLC

95 INTU LN Equity Intu Properties PLC

80 RSA LN Equity RSA Insurance Group PLC

96 MGGT LN Equity Meggitt PLC

81 ITRK LN Equity* Intertek Group PLC

97 MERL LN Equity* Merlin Entertainments PLC

82 EZJ LN Equity easyJet PLC

98 HIK LN Equity* Hikma Pharmaceuticals PLC

83 RMG LN Equity* Royal Mail PLC

99 ANTO LN Equity Antofagasta PLC

84 BKG LN Equity Berkeley Group Holdings PLC

100 SPD LN Equity* Sports Direct International PLC

85 SMIN LN Equity Smiths Group PLC

101 FRES LN Equity* Fresnillo PLC

86 RRS LN Equity Randgold Resources Ltd

* Stock was not included in the sample due to insufficient or anomalous data

Table 6 – Summary Statistics

No. of

Observations Mean

Standard

Deviation Min Median Max

TO_UK 69 0.002290 0.000527 0.001445 0.002200 0.004382

AMIHUD_UK 69 0.000009 0.000005 0.000004 0.000009 0.000031

BID_ASK_UK 69 0.001492 0.000340 0.001075 0.001386 0.002371

TED_UK 69 0.002120 0.001851 -0.001000 0.001600 0.007500

dCUR_DEP_UK 69 0.000081 0.000419 -0.002400 0.000100 0.000900

dRES_DEP_UK 68 0.000999 0.003965 -0.008999 0.000742 0.010989

dNCORE_UK 68 -8528.800 24704.40 -72277.00 -6345.500 63604.00

MRET 69 0.002305 0.036664 -0.072662 0.005356 0.081065

MSTDEV 69 0.009291 0.004078 0.0028253 0.008729 0.022775

dIR_UK 69 -0.043478 0.290273 -0.600000 -0.100000 0.700000

dIPI_UK 69 0.11304 1.221127 -2.000000 0.000000 9.900000

Table 7 – Correlation Matrix

TO_UK AMIHUD_UK BID_ASK_UK TED_UK dCUR_DEP_UK dRES_DEP_UK dNCORE_UK

TO_UK 1.0000

AMIHUD_UK 0.2596 1.0000

BID_ASK_UK 0.3569 0.6633 1.0000

TED_UK 0.0079 0.5381 0.6898 1.0000

dCUR_DEP_UK 0.0458 -0.0530 -0.0157 0.0678 1.0000

dRES_DEP_UK -0.1095 0.1445 0.2902 0.5420 0.1671 1.0000

dNCORE_UK -0.1053 -0.1154 -0.2233 0.0099 -0.1763 0.1154 1.0000

MRET_UK -0.2235 0.0329 0.0974 -0.0008 -0.0182 0.3199 0.0397

MSTDEV_UK 0.5416 0.4012 0.3670 0.2730 -0.0049 0.0102 -0.0632

dIR_UK 0.0473 -0.0136 0.0450 -0.1888 0.0952 -0.0960 0.0600

dIPI_UK -0.1380 -0.0650 -0.0753 -0.0310 -0.0656 -0.0928 0.0902

MRET_UK MSTDEV_UK dIR_UK dIPI_UK

MRET_UK 1.0000

MSTDEV_UK -0.4135 1.0000

dIR_UK -0.0257 0.0273 1.0000

dIPI_UK -0.0719 -0.1068 0.0027 1.0000

Table 8 – Augmented Dickey-Fuller Stationarity Tests

Variable / Null Hypothesis H0: Unit Root

Turnover Rate (TO_UK) -5.000***

(0.000)

Amihud Illiquidity Ratio

(AMIHUD_UK)

-4.712***

(0.001)

Effective Bid-Ask Spread

(BID_ASK_UK)

-5.610***

(0.000)

Eurozone TED Spread (TED_UK) -3.065**

(0.029)

Currency to Deposit Ratio

(dCUR_DEP_UK)

-9.567***

(0.000)

Reserves to Deposit Ratio

(RES_DEP_UK)

-6.190***

(0.000)

MFIs Non-Core Funding Liquidity

(dNCORE_UK)

-8.865***

(0.000)

Stock Market Return (MRET_UK) -12.904***

(0.000)

Stock Market Standard Deviation

(MSTDEV_UK)

-4.883***

(0.000)

Inflation Rate (dIR_UK) -9.779***

(0.000)

Industrial Production Index (dIPI) -12.455***

(0.000)

Note: P-values in parenthesis. *, ** and *** denote 10%, 5% and 1% significance levels

Table 9 – VAR Order Selection Criteria

Sample: 2010m4 – 2015m9

Number of Observations = 66

lag LL LR df p FPE AIC HQIC SBIC

0 1941.96

1.9e-34 -57.7865 -57.3277 -56.6254

1 2067.18 250.45 49 0.000 1.9e-35* -60.0963* -58.9951* -57.3095*

2 2106.98 79.6* 49 0.004 2.8e-35 -59.8176 -58.074 -55.4051

Note: * denote optimal values for each criterion

Endogenous: dCUR_REP_UK, dRES_DEP_UK, TED_UK, dNCORE_UK, TO_UK, AMIHUD_UK,

BID_ASK_UK

Exogenous: dIR_UK, dIPI_UK, MRET_UK, MSTDEV_UK, _cons

Table 10 – Lagrange-Multiplier Test for Residual Autocorrelation

Lag Chi-Square Statistic df Prob. > Chi-Square Statistic

1 60.7909 49 0.12036

2 55.4913 49 0.24337

H0: No autocorrelation at lag order

Table 11 – Eigenvalue Condition for Stability Test

Eigenvalue Modulus

.9036564 .903656

.8344788 .834479

-.1967777 + .7237386i .750013

-.1967777 - .7237386i .750013

.5504131 .550413

-.154036 + .505169i .528131

-.154036 - .505169i .528131

-.520494 .520494

-.36429 + .2405469i .436543

-.36429 -.2405469i .436543

.3898769 .389877

-.06119682 +.3389056i .344386

-.06119682 - .3389056i .344386

.03212938 .032129

All the eigenvalues lie inside the unit circle.

VAR satisfies stability condition.

Impulse Response Functions

Graph 6 – Response of TO_UK to

TED_UK

Graph 7 – Response of TO_UK to

dCUR_DEP_UK

Graph 8 – Response of AMIHUD_UK to

dCUR_DEP_UK

Graph 9 – Response of BID_ASK_UK

to dCUR_DEP_UK

Graph 10 – Response of BID_ASK_UK

to dRES_DEP_UK

Graph 11 – Response of TO_UK to

dNCORE_UK

Legend: Orthogonalized IRF 95% Confidence Interval Bands

Graph 12 – Response of AMIHUD_UK to dNCORE_UK

Graph 13 – Response of BID_ASK_UK to dNCORE_UK

Graph 14 – Response of dNCORE_UK to BID_ASK

Legend: Orthogonalized IRF 95% Confidence Interval Bands