Macroeconomic Sources of Systematic Liquidity
50 Pages Posted: 4 Oct 2004
Date Written: September 14, 2004
Abstract
This paper examines macroeconomic sources of time-series variation in the U.S. stock market liquidity over the last four decades. The vector autoregression analyses show that macroeconomic fundamentals are significant determinants of liquidity and their effects are stronger prior to the mid 1980's when business cycle dynamics are more volatile. During the first half of the sample, liquidity improves substantially in response to negative shocks in the supply-side inflation and following expansionary monetary policy shocks. During the latter half of the sample, aggregate liquidity is less responsive and more resilient to both market-level and economy-wide shocks.
Keywords: Systematic liquidity, macroeconomic factors, vector autoregression
JEL Classification: G10
Suggested Citation: Suggested Citation
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