Stock Market Liquidity and the Macroeconomy: Evidence from Japan

29 Pages Posted: 10 Jan 2006

See all articles by Woon Gyu Choi

Woon Gyu Choi

International Monetary Fund (IMF); The Bank of Korea; Bank of Korea - Economic Research Institute

David E. Cook

Hong Kong University of Science & Technology (HKUST) - Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: January 2005

Abstract

In a liquid financial market, investors are able to sell large blocks of assets without substantially changing the price. We document a steep drop in the liquidity of the Japanese stock market in the post-bubble period and a steep rise in liquidity risk. We find that, during Japan's deflationary period, firms with more liquid balance sheets were less exposed to stock market liquidity risk, while slowly growing firms were highly exposed to liquidity shocks. Also, aggregate liquidity had macroeconomic effects on aggregate demand through its effect on money demand.

Keywords: Stock market liquidity, Liquidity shocks, Vector autoregression

JEL Classification: E50, G10

Suggested Citation

Choi, Woon Gyu and Cook, David E., Stock Market Liquidity and the Macroeconomy: Evidence from Japan (January 2005). IMF Working Paper No. 05/6, Available at SSRN: https://ssrn.com/abstract=874227

Woon Gyu Choi (Contact Author)

International Monetary Fund (IMF) ( email )

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The Bank of Korea ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794, 100-794

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

David E. Cook

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
2538 7614 (Phone)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
2538 7614 (Phone)

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