A Liquidity Program to Stabilize Equity Markets

Abstract

We consider a program that, by bringing additional liquidity to the equity markets, would benefit market participants, listed companies, an exchange, and the broader economy. Established by an issuer, managed by a third party broker-dealer intermediary, formally structured and maximally transparent, the program involves corporate share repurchase in a falling market and issuance in a rising market. We use simulation analysis to assess the procedure for 30 DOW and 30 DAX stocks for the five year span, 2008-2012; our findings indicate that the program can generate profits for firms that institute it, and we suggest that additional steps be taken to refine, further test, and implement the procedure.

Keywords: Liquidity, stabilization, equity markets

JEL Classification: G10