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Return dispersion, stock market liquidity and aggregate economic activity

Stavros Degiannakis (), Andreas Andrikopoulos (), Timotheos Angelidis () and Christos Floros

No 166, Working Papers from Bank of Greece

Abstract: This paper examines the effect of return dispersion on the dynamics of stock market liquidity, risk and return. Moreover, the importance of return dispersion in forecasting aggregate economic activity is rediscovered in the context of a regime switching model that accounts for stock market fluctuations and their association with the state of the economy. We find that there is a bidirectional, Granger-causal association between illiquidity and return dispersion in the U.S. stock market. The empirical results show that stock returns can help us predict both realized volatility as well as return dispersion. We report that there is a significant relation between economic conditions and the risk measures (return dispersion and realized volatility).

Keywords: Illiquidity; Aggregate Economic Activity; Realized Volatility; Regime Switching; Return Dispersion; Stock Market Liquidity. (search for similar items in EconPapers)
JEL-codes: G10 C23 C32 C40 C51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2013-11
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