Financial market illiquidity shocks and macroeconomic dynamics: Evidence from the UK
Journal of Banking & Finance, 2018, vol. 89, issue C, 225-236
We examine the link between financial market illiquidity and macroeconomic dynamics by fitting a Bayesian time-varying parameter VAR with stochastic volatility to UK data from 1988Q1 to 2016Q4. We capture liquidity conditions in the stock market using a battery of illiquidity proxies. This paper departs from previous studies examining macro-financial linkages by using theoretically grounded sign restrictions, and conducting structural inference in a non-linear framework. We document both statistically significant differences in the transmission of these shocks, and substantial increases in the economic importance of these shocks during the 2008 recession.
Keywords: Stock market illiquidity; Time-varying parameter VAR; Macro-financial linkages; Sign restrictions (search for similar items in EconPapers)
JEL-codes: E32 E44 E47 E52 E58 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:89:y:2018:i:c:p:225-236
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