Liquidity on Eurozone stock markets: A non-linear approach

Boumediene Souiki () and Françoise Seyte ()
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Boumediene Souiki: MRE - Montpellier Recherche en Economie
Françoise Seyte: MRE - Montpellier Recherche en Economie

Economics Bulletin, 2024, vol. 44, issue 1, 321 - 340

Abstract: The purpose of this paper is to study the relationship between liquidity and returns in the main European stock markets for the period of January 2005- December 2020. Asset liquidity is measured by three correlated indicators (ROLL, CS and HL). The methodology adopted consists of constructing threshold autoregressive model (TAR) for market returns while using liquidity indicators as a transition variable. The distinction between the different regimes helps clarify the relationship between these variables. The results show that the detected thresholds are different depending on the stock market. We then find that the impact of the liquidity indicator on returns is different for regime 1 and regime 2, and we propose an economic explanation for this difference. main European stock markets for the period of January 2005- December 2020. Asset liquidity is measured by three correlated indicators (ROLL, CS and HL). The methodology adopted consists of constructing threshold autoregressive model (TAR) for market returns while using liquidity indicators as a transition variable. The distinction between the different regimes helps clarify the relationship between these variables. The results show that the detected thresholds are different depending on the stock market. We then find that the impact of the liquidity indicator on returns is different for regime 1 and regime 2, and we propose an economic explanation for this difference. main European stock markets for the period of January 2005- December 2020. Asset liquidity is measured by three correlated indicators (ROLL, CS and HL). The methodology adopted consists of constructing threshold autoregressive model (TAR) for market returns while using liquidity indicators as a transition variable. The distinction between the different regimes helps clarify the relationship between these variables. The results show that the detected thresholds are different depending on the stock market. We then find that the impact of the liquidity indicator on returns is different for regime 1 and regime 2, and we propose an economic explanation for this difference.

Keywords: Liquidity risk; Market risk; TAR model; Nonlinear model. (search for similar items in EconPapers)
JEL-codes: C1 Y1 (search for similar items in EconPapers)
Date: 2024-03-30
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