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

See all articles by Shiu‐Sheng Chen

Shiu‐Sheng Chen

Department of Economics, National Taiwan University

Yu‐Hsi Chou

National Taiwan Normal University, Department of Civic Education and Leadership

Chia-Yi Yen

Mannheim Business School

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

Chen, Shiu-Sheng and Chou, Yu-hsi and Yen, Chia-Yi, Predicting US Recessions with Stock Market Illiquidity (April 28, 2015). The B.E. Journal of Macroeconomics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2550720 or http://dx.doi.org/10.2139/ssrn.2550720

Shiu-Sheng Chen

Department of Economics, National Taiwan University ( email )

No. 1, Sec. 4, Roosevelt Road
Taipei, 10617
Taiwan

Yu-hsi Chou (Contact Author)

National Taiwan Normal University, Department of Civic Education and Leadership ( email )

No. 162, Section 1
Heping East Road
Taipei City, Da’an District 106
Taiwan

Chia-Yi Yen

Mannheim Business School ( email )

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