Modelling impact of monetary policy on stock market liquidity: a dynamic copula approach

Xiaojun Chu

Applied Economics Letters, 2015, vol. 22, issue 10, 820-824

Abstract: This article investigates the dependence structure between monetary policy and stock market liquidity in China. The dynamic 'symmetrized JC' copula copula is applied to capture evolving asymmetric behaviours and tail dependence. The empirical evidence shows that less liquid stock markets are influenced by contractionary monetary policy, and highly liquid stock markets are dependent on expansionary monetary policy. The asymmetric effect of monetary shocks on stock market liquidity is also found. The empirical results also indicate that the strength of lower-tail dependence between monetary liquidity and stock liquidity rises significantly for the post-crisis period.

Date: 2015
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DOI: 10.1080/13504851.2014.980566

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