Global Liquidity: A Review of Concepts, Measurement and Impact on Asset Prices and a Study of the Possible Impact on the Indian Stock Market

Abstract

In this paper we try to understand the concept of global liquidity and take a preliminary look at its possible impact on emerging economy stock markets like India’s. Through most of the paper we follow studies by the Bank for International Settlements (BIS), the European Central Bank (ECB), and the International Monetary Fund (IMF) to discuss the concept of global liquidity from a financial stability point of view, and specify the factors driving such liquidity and the interactions that enhance the effects of official liquidity provided by the central banks. We also list some recently proposed indicators as measures of global liquidity and see whether they may perform better in terms of predicting financial instabilities. We then use such an indicator to understand how the post-crisis surges in global liquidity impact Indian stock markets.

Keywords: global liquidity, cross-border credit, effect of global liquidity on equity prices, impact of global liquidity expansion on Indian stock markets

JEL Classification: E44, E52, C32