On Stock Market Illiquidity and Real-Time GDP Growth

43 Pages Posted: 12 Oct 2012 Last revised: 28 May 2014

See all articles by Chris Florackis

Chris Florackis

University of Liverpool (UK)

Gianluigi Giorgioni

University of Liverpool - Management School (ULMS)

Alexandros Kostakis

University of Liverpool Management School; University of Manchester - Manchester Business School

Costas Milas

University of Liverpool - Management School (ULMS)

Date Written: May 27, 2014

Abstract

This study examines whether stock market illiquidity forecasts real UK GDP growth using data over the period 1989q1-2012q2. Apart from standard linear model specifications, we also utilize non-linear models, which allow for regime switching behavior in terms of a liquid versus an illiquid market regime and over the phases of the business cycle. Our findings support a statistically significant negative relationship between stock market illiquidity and future UK GDP growth over and above the usual control variables. This relationship is found to be stronger during periods of highly illiquid market conditions and weak economic growth. Our out-of-sample forecasting analysis indicates that a regime-switching model of illiquid versus liquid market conditions predicts UK growth better than any other model. Actually, this model is the only one to significantly outperform the GDP growth forecasts published in the Bank of England’s Inflation Report.

Keywords: stock market illiquidity, divisia money, GDP growth, non-linear model

JEL Classification: O11, O20, E44, G01,G1, G10

Suggested Citation

Florackis, Chris and Giorgioni, Gianluigi and Kostakis, Alexandros and Milas, Costas, On Stock Market Illiquidity and Real-Time GDP Growth (May 27, 2014). Journal of International Money and Finance, 2014, Vol. 44, pp. 210–229. Available at SSRN: https://ssrn.com/abstract=2160276 or http://dx.doi.org/10.2139/ssrn.2160276

Chris Florackis (Contact Author)

University of Liverpool (UK) ( email )

The Management School
University of Liverpool
Liverpool, L 697ZH
United Kingdom

Gianluigi Giorgioni

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Alexandros Kostakis

University of Liverpool Management School ( email )

Chatham Building
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://www.alexkostakis.com

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Costas Milas

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

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