Stock liquidity and the Taylor rule

Lei Jiang

Journal of Empirical Finance, 2014, vol. 28, issue C, 202-214

Abstract: This paper examines how stock market liquidity and commonality in liquidity are impacted by real-time output gap and inflation, as these macroeconomic variables have been shown to be the main drivers of monetary policy according to the Taylor rule. We show that an increase in the output gap and inflation lowers stock liquidity and increases commonality in liquidity, since it points to a contractionary monetary policy and is likely to lead to a decline in the liquidity providers' funding liquidity. This effect is larger for stocks with low market capitalization and low liquidity.

Keywords: Liquidity; Commonality in liquidity; Taylor rule (search for similar items in EconPapers)
JEL-codes: E58 G10 G21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:28:y:2014:i:c:p:202-214

DOI: 10.1016/j.jempfin.2014.07.001

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