Market Wide Liquidity Instability in Business Cycles

Sidharta Chatterjee

MPRA Paper from University Library of Munich, Germany

Abstract: This paper deals with an existing question; does market liquidity disequilibrium leads to stock market bubble burst? Contemporary research has shown that liquidity is the key driving force behind capital market growth and its sustenance. Stock markets usually react to changes in market-wide liquidity, whose supply-demand cycle fluctuates with investor behavior actions. Market illiquidity due to supply shocks or sudden redemption, does exert strain on the financial markets as of when if too much untenable, lead to market crash. In this paper, we investigate how market-wide fluctuations in liquidity result in return volatilities and stock market return asymmetries as also to prove the notion whether liquidity per se, is the sole driver of stock market growth.

Keywords: Liquidity; business cycles; investor behavior; returns asymmetry (search for similar items in EconPapers)
JEL-codes: C32 E44 (search for similar items in EconPapers)
Date: 2009-10-24
New Economics Papers: this item is included in nep-bec and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:18117

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