Stock market liquidity and macro-liquidity shocks: Evidence from the 2007-2009 financial crisis

Chris Florackis, Alexandros Kontonikas () and Alexandros Kostakis‌
Authors registered in the RePEc Author Service: Alexandros Kostakis

Working Papers from Business School - Economics, University of Glasgow

Abstract: We develop an empirical framework that links micro-liquidity, macro-liquidity and stock prices. We provide evidence of a strong link between macro-liquidity shocks and the returns of UK stock portfolios constructed on the basis of micro-liquidity measures between 1999- 2012. Specifically, macro-liquidity shocks, which are extracted on the meeting days of the Bank of England Monetary Policy Committee relative to market expectations embedded in 3- month LIBOR futures prices, are transmitted in a differential manner to the cross-section of liquidity-sorted portfolios, with liquid stocks playing the most active role. We also find that there is a significant increase in shares’ trading activity and a rather small increase in their trading cost on MPC meeting days. Finally, our results emphatically document that during the recent financial crisis the shocks-returns relationship has reversed its sign. Interest rate cuts during the crisis were perceived by market participants as a signal of deteriorating economic prospects and reinforced “flight to safety” trading.

Keywords: Liquidity Shocks; Monetary Policy; Market Micro-Structure; Stock Returns. (search for similar items in EconPapers)
JEL-codes: E43 E44 E51 E52 G12 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.gla.ac.uk/media/media_289830_en.pdf (application/pdf)

Related works:
Journal Article: Stock market liquidity and macro-liquidity shocks: Evidence from the 2007–2009 financial crisis (2014)
Working Paper: Stock Market Liquidity and Macro-Liquidity Shocks: Evidence from the 2007-2009 Financial Crisis (2013)
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:gla:glaewp:2013_13

Access Statistics for this paper

More papers in Working Papers from Business School - Economics, University of Glasgow Contact information at EDIRC.
Bibliographic data for series maintained by Business School Research Team ().