Predicting US recessions with stock market illiquidity

Shiu-Sheng Chen, Yu-Hsi Chou and Yen Chia-Yi
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Yen Chia-Yi: Department of Finance, National Taiwan University and Quantitative Strategies Department, Risksoft Technology Ltd., Taipei City, Taiwan

The B.E. Journal of Macroeconomics, 2016, vol. 16, issue 1, 93-123

Abstract: In this paper, we investigate the dynamic link between recessions and stock market liquidity by examining the predictive content of illiquidity for US recessions. After controlling for other commonly featured recession predictors such as term spreads and credit spreads, we find that the illiquidity measure proposed by (Amihud, Y. 2002. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets 5: 375–340) has strong power in predicting recessions. Moreover, the predictability of the illiquidity measure of small firms is found to be stronger than that of large firms, which supports the hypothesis of “flight to liquidity.”

Keywords: probit model; recession; stock market illiquidity (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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DOI: 10.1515/bejm-2015-0009

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