Impact of liquidity spillovers among industrial sectors on stock markets during crisis periods: Evidence from the S&P 500 index

We investigate liquidity spillovers among industry sectors in the S&P 500 index to explain the interconnection dynamics in the US stock market. To do so, we define a sectoral liquidity measure based on the Amihud liquidity measure. Employing the spillover model, we further examine US sectors’ liquidity spillovers during the global financial crisis (GFC) and the COVID-19 pandemic. Based on the relationship between liquidity in financial markets and business cycles, our findings show that (i) liquidity connections became stronger during both crises, (ii) in the GFC period, the material sector was the primary transmitter of total liquidity spillovers, whereas in the COVID-19 pandemic period, the consumer discretionary sector was the main conveyor of total liquidity spillovers and the real estate sector was the dominant recipient of total liquidity spillovers, and (iii) net liquidity spillovers between all sectors fluctuated notably during the GFC, while the industrial, consumer staples, and healthcare sectors had the largest net liquidity spillovers during the COVID-19 crisis. These findings have important implications for portfolio managers and policymakers.