Predicting US Recessions with Stock Market Illiquidity
The B.E. Journal of Macroeconomics, Forthcoming
37 Pages Posted: 17 Jan 2015 Last revised: 17 Jun 2015
Date Written: April 28, 2015
Abstract
In this paper, we investigate the dynamic link between recessions and stock market liquidity by examining the predictive content of illiquidity for US recessions. After controlling for other commonly featured recession predictors such as term spreads and credit spreads, we find that the illiquidity measure proposed by Amihud (2002) has strong power in predicting recessions. Moreover, the predictability of the illiquidity measure of small firms is found to be stronger than that of large firms, which supports the hypothesis of "flight to liquidity.''
Keywords: Recession, Stock market illiquidity, Probit model
JEL Classification: E32, E44, G01
Suggested Citation: Suggested Citation