90 APPLIED FINANCE LETTERS SPECIAL ISSUE 9.1, 2020 LIQUIDITY IN ASIAN FINANCIAL MARKETS: CROWDING OUT OR SPILLOVER EFFECT SONAL THUKRAL 1 , RAHUL SIKKA 1* 1. Delhi Technological University, India * Corresponding Author: Research Scholar, Delhi School of Management, Delhi Technological University, Shahbad Daulatpur, Main Bawana Road, Delhi – 110042, India.  rahulsikka123@yahoo.co.in Abstract The paper attempts to explore the relationship between the stock market and the corporate bond market, with a focus on the inter-dependency of liquidity between the two markets. The study employs a panel dataset to assess the impact of stock market liquidity on the corporate bond market liquidity for the top five Asian economies (ranked by GDP) for the period 2008-2017. In contrast to a limited number of earlier studies that reported a spillover effect of liquidity among the markets for stock and government bonds, the results of the present study convey that an increase in stock market liquidity tends to eat up the liquidity of the corporate bonds, even after controlling for government bond yield and inflation rate changes. The findings indicate a crowding-out effect instead of a spillover effect, as indicated by related studies. The ‘flight-to-quality’ argument provides one possible explanation of liquidity moving away from one market to the other. This implies that if regulators’ policies are focused on developing only one type of market, it may crowd out the liquidity and the development of the other market. The study suggests that the government focus more on the corporate bond market, which is yet to flourish in the Asian markets as compared to its stock market counterparts. The paper is one of the few attempts that focus on the corporate bond market and its liquidity and aims to ignite a debate on the possible linkages between the liquidity of the corporate bond market and the stock market. Keywords: Liquidity, corporate bond market, stock market, turnover ratio, crowding out, spillover effect 1. Introduction Financial Market liquidity has garnered increased interest in the past with close lens on the stock market. While focusing on the stock market, some studies have explored the effect of market liquidity on the prices and returns in the market (Amihud, 2002; Amihud and Mendelson, 1986; Jacoby et al., 2000; Jones, 2002; Jun et al., 2003; Pástor and Stambaugh, 2003). At the same time, others have explored factors that influence liquidity in the stock market (Correia and Amaral, 2014; Grossman and Miller, 1988; Hameed et al., 2010; Heflin et al., 2002; Kim et al., 2006). With regards to the bond market, the extant literature has analyzed the determinants of bond market development, but most of the work has focused on the size or capitalization of the market (Bhattacharyay, 2013; Eichengreen and Luengnaruemitchai, 2011; Maurya and Mishra, 2016; Mu et al., 2013; Smaoui et al., 2017; Teplova and Sokolova, 2018), and only a few studies examine the liquidity aspect of the bond market. Goyenko et al. (2011) and Gündüz et al. (2018) explore the factors that influence liquidity in the bond markets, while Lin et al. (2011) study the impact of liquidity on corporate bond returns. Further, the literature exploring the interlinkages of liquidity between the bond market and the stock market is almost missing as per our knowledge. Chordia et al. (2005) found liquidity shocks to be positively correlated across the two markets. In contrast, Goyenko and Ukhov (2009) found bond market