Illiquidity Premium and Monetary Conditions in Emerging Markets: An Empirical Examination of Taiwan Stock Markets

Chia-Cheng Chen, Chia-Li Tai and Yi-Sheng Liu
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Chia-Cheng Chen: Department of Finance, Ling Tung University of Science and Technology, Taiwan,
Chia-Li Tai: Department of Finance, National Yunlin University of Science and Technology, Taiwan.
Yi-Sheng Liu: Department of Finance, National Yunlin University of Science and Technology, Taiwan.

International Journal of Economics and Financial Issues, 2020, vol. 10, issue 1, 109-117

Abstract: This study empirically examines the illiquidity premium of Taiwan stock markets and its relationship with monetary policies. We find that commonly used illiquidity measures are generally sensitive and capable of capturing market illiquidity, particularly during the most volatile periods. Evidence shows that unconditional illiquidity is significantly priced across three illiquidity measures during the sample period. Aggregate market illiquidity innovations are noticeably affected by monetary policies. The results of Granger causality tests reveal that expansive monetary policy improves market illiquidity, whereas restrictive policy adversely affects market liquidity.

Keywords: Illiquidity; illiquidity premium; monetary policy; asset pricing; Granger's causality tests (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2020
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