Does Money Supply and Liquidity Affect Share Prices?

51 Pages Posted: 11 Aug 2013

See all articles by Mohamed Ariff

Mohamed Ariff

Bond University; University Putra Malaysia

Tinfah Chung

HELP University; HELP University

Shamsher Mohamad

University Putra Malaysia - Graduate School of Management

Date Written: August 8, 2013

Abstract

This paper reports results that link money supply to banking liquidity to share price formation. We apply a more current generalized method of moments procedure to run a three-equations structural model to study the money-to-liquidity-to-share-price effect in three major markets using data over 47 years. The first research question is on whether Friedman’s liquidity effect hypothesis is supported; Is there a money supply effect via liquidity on share price is the second question. The results show support for the liquidity hypothesis in all three markets: money supply through its liquidity creation influences share prices significantly. The tests included controls for monetary regime switches and the Global Financial Crisis. The resulting findings, obtained after solutions to some serious econometric issues in existing studies, provide clear verification of theories on money supply effect on liquidity and also on share price.

Keywords: Liquidity, Share prices, Endogeneity, Causality, Generalised Method of Moments, Structural break

JEL Classification: E41, E44

Suggested Citation

Ariff, Mohamed and Chung, Tinfah and Mohamad, Shamsher, Does Money Supply and Liquidity Affect Share Prices? (August 8, 2013). Available at SSRN: https://ssrn.com/abstract=2307737 or http://dx.doi.org/10.2139/ssrn.2307737

Mohamed Ariff (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
Australia

University Putra Malaysia ( email )

Selangor Darul Ehsan
Serdang, Selangor 43400
Malaysia

Tinfah Chung

HELP University ( email )

Jalan Semantan
Kuala Lumpur, Kuala Lumpur 50490
Malaysia
35633902 (Phone)

HELP University ( email )

Kompleks Pejabat Damansara (KPD) Jalan Dungun
Kuala Lumpur
Malaysia

Shamsher Mohamad

University Putra Malaysia - Graduate School of Management ( email )

Selangor Darul Ehsan
Serdang, Selangor 43400
Malaysia

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