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

Oral Erdogan

Piri Reis University

Paul B. Bennett

Fordham University Business School

Cenktan Ozyildirim

Istanbul Bilgi University

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

Erdogan, Oral and Bennett, Paul B. and Ozyildirim, Cenktan, An Early Warning Signal of Financial Crisis by Using the Deepness and Liquidity in Stock Markets (January 20, 2012). International Review of Applied Financial Issues and Economics, Vol. 4, No. 1, March 2012 ; Fordham University Schools of Business Research Paper No. 2054498. Available at SSRN: https://ssrn.com/abstract=2054498

Oral Erdogan (Contact Author)

Piri Reis University ( email )

Postane Mahallesi
Tuzla
Istanbul, 34940
Turkey

Paul B. Bennett

Fordham University Business School ( email )

1790 Broadway
New York
New York, NY 10019
United States
917 434 0226 (Phone)

HOME PAGE: http://business.fordham.edu/faculty/bennett

Cenktan Ozyildirim

Istanbul Bilgi University ( email )

Eski Silahtarağa Elektrik Santralı
Silahtarağa Mah. Kazım Karabekir Cad. No: 1 Eyüp
Istanbul, 34060
Turkey

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