An Early Warning Signal of Financial Crisis by Using the Deepness and Liquidity in Stock Markets
International Review of Applied Financial Issues and Economics, Vol. 4, No. 1, March 2012
Fordham University Schools of Business Research Paper No. 2054498
11 Pages Posted: 9 May 2012 Last revised: 9 Jul 2012
Date Written: January 20, 2012
Abstract
The 'irrational exuberance' in the financial markets has been blamed for the recent subprime crisis and the consequent collapse of the global economy in 2008. This study argues that the relationship between measures of stock market 'macro deepness' and 'macro liquidity' can indicate development of abnormalities in the financial markets which generally ends up with instabilities in the real economy. First, the balance between the market deepness and market liquidity is identified using a regression analysis of panel data for 23 countries between 1991 and 2008. The residuals from the regression represent 'macro liquidity deviations' (MLD) from the 'usual' relationships between the variables. We find that the current and second lag of MLD has a significant predictive effect on current GDP growth. We conclude that watching the liquidity and deepness parameters can be a signal of heightened risk of financial crisis.
Keywords: stock market liquidity, deepness, financial crisis, panel data analysis
JEL Classification: G01, G15, E44
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Financial Dependence and Growth
By Raghuram G. Rajan and Luigi Zingales
-
Stock Markets, Banks, and Growth: Panel Evidence
By Thorsten Beck and Ross Levine
-
Stock Markets, Banks, and Growth: Panel Evidence
By Thorsten Beck and Ross Levine
-
Stock Markets, Banks, and Economic Growth
By Ross Levine and Sara Zervos
-
Financial Development and Economic Growth: Views and Agenda
By Ross Levine
-
Stock Markets, Banks, and Growth: Correlation or Causality
By Thorsten Beck and Ross Levine
-
By Thorsten Beck, Asli Demirgüç-kunt, ...
-
Finance, Firm Size, and Growth
By Thorsten Beck, Asli Demirgüç-kunt, ...
-
Finance, Firm Size, and Growth
By Thorsten Beck, Asli Demirgüç-kunt, ...
-
Financial Intermediation and Growth: Causality and Causes
By Ross Levine, Norman Loayza, ...