Liquidity Shocks and Stock Bubbles

Ogonna Nneji ()
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Ogonna Nneji: ICMA Centre, Henley Business School, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: This study presents and empirically tests a simple framework that examines the effects of market liquidity (the ease with which stocks are traded) and funding liquidity (the ease with which market participants can obtain funding) on stock market bubbles. Three key findings emerge from this research. First, negative market and funding liquidity shocks increase the probability of stock market bubbles collapsing. Second, market liquidity has a more prevalent effect on stock bubbles than funding liquidity. Third, liquidity shocks provide warning signals of impending bubble collapses. A trading rule based on recursive forecasts from the aforementioned framework is used to illustrate the economic significance of the liquidity-bubble relationship.

Keywords: funding liquidity; market liquidity; liquidity shocks; speculative bubble; trading (search for similar items in EconPapers)
JEL-codes: C13 C51 C58 G12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-07, Revised 2014-01
New Economics Papers: this item is included in nep-cfn
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Persistent link: https://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2013-07

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