Multidimensional Stock Market Liquidity and Business Cycles

37 Pages Posted: 16 Feb 2021

See all articles by Thomar van Hees

Thomar van Hees

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: February 11, 2021

Abstract

We examine the impact of multidimensional stock market liquidity on business cycles that captures the key market liquidity characteristics. Using seven different liquidity measures, we find that the effect of liquidity on economic growth and recessions differs among liquidity measures in the US stock market in the period of 1952 to 2011. Volume-based and transaction costs-based measures contain robust information about future conditions of the US economy, while for market-impact and price-based measures there is no causality in either direction. Moreover, the illiquidity ratio dominates all stock market liquidity measures in forecasting economic recessions. Our findings exemplify the importance of alternative liquidity proxies in explaining the state of the US economy.

Keywords: Stock Market Liquidity, Business Cycles, US Economy, Granger-Causality Test

JEL Classification: G15, G17, G41

Suggested Citation

van Hees, Thomar and Verschoor, Willem F. C., Multidimensional Stock Market Liquidity and Business Cycles (February 11, 2021). Available at SSRN: https://ssrn.com/abstract=3783724 or http://dx.doi.org/10.2139/ssrn.3783724

Thomar Van Hees

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Palma de Cima
Lisbon, 1649-023
Portugal

Willem F. C. Verschoor (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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