The bankrupt of Lehman Brothers in 2008 triggered a
series of panic selling on stocks, especially the stock of insurance companies,
which makes the illiquidity of stock markets. Therefore, in this study we
examine the relation between insurance companiesí stock liquidity and return,
and market makersí behavior when market is illiquid. We find that before
financial crisis market makersí inventory level of stock is not sufficient,
hence, they have to adjust quote price when they confront order imbalances.
Nevertheless, the impacts of order imbalances become insignificant after
crisis. Market makers do not adjust quote price as much as to fully reflect the
information because they need time to assert that the imbalances contain
information before financial crisis. Nevertheless, they fully adjust quote
price simultaneously when they confront large order imbalance after financial
crisis, because they consider that large order imbalances are definitely
informed trading when market is illiquid.
Connection between order imbalances and price volatility is low. It
means that market makers have great ability to stable price volatility when facing
the unexpected shocks. Market of insurance companies has less liquidity after
financial crisis. While the market is illiquid after crisis, investors do not
require significant higher liquidity premium.
JEL classification numbers: G22
Keywords: Insurance companies, stock
liquidity and return.