Stock Market Illiquidity's Predictive Role Over Economic Growth: The Australian Evidence

Alan Rai

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2015, vol. 18, issue 02, 1-30

Abstract: In this paper, I examine the ability of equity market illiquidity to predict Australian macroeconomic variables, between 1976 and 2010. In contrast to existing, U.S.-based, studies, I find that stock market illiquidity does not, on average, have much predictive power over economic growth. Consistent with the weak in-sample predictive power, economic growth forecasts from models that exclude stock illiquidity from the set of explanatory financial variables are statistically no worse than forecasts from models that include illiquidity. However, I find strong evidence that the predictive power of equity market illiquidity is state-contingent, with much higher predictability in states associated with economic and financial stress. The difference between the single-state and regime-switching models' results reflects the fact that, as the nonstressed states have been much more prevalent, parameter estimates from a single-state model averages over both stressed and non-stressed states thus lowering the statistical and economic significance of the estimates.

Keywords: Autoregression; bid-ask spread; economic growth; forecasts; regime switching; trading volume; G12; G14; G17 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219091515500071
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:rpbfmp:v:18:y:2015:i:02:n:s0219091515500071

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219091515500071

Access Statistics for this article

Review of Pacific Basin Financial Markets and Policies (RPBFMP) is currently edited by Cheng-few Lee

More articles in Review of Pacific Basin Financial Markets and Policies (RPBFMP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().