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Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia

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Author Info
Söderberg, Jonas () (Centre for Labour Market Policy Research (CAFO))
Abstract

This paper evaluates 14 macroeconomic variables’ ability to forecast changes in monthly liquidity on the Scandinavian order-driven stock exchanges. Every macroeconomic variable is evaluated both out-of-sample and in-sample and against three different benchmark models of market variables and asymmetries concerning up and down markets. Policy rate on Copenhagen, broad money growth on Oslo, and short-term interest rate and flows from mutual funds on Stockholm significantly improve the out-of-sample forecasts of liquidity at these exchanges. However, most proposed macroeconomic variables can be rejected as forecasters of liquidity on the Scandinavian stock exchanges. There are many variables that predict in-sample liquidity that do not forecast out-of-sample. This stresses the importance of conducting out-of-sample tests when examining whether macroeconomic variables predict liquidity. In addition, this is the first paper confirming that stock market liquidity can be forecast out-of-sample.

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Paper provided by Centre for Labour Market Policy Research (CAFO), School of Management and Economics, Växjö University in its series CAFO Working Papers with number 2009:10.

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Length: 62 pages
Date of creation: 01 Dec 2008
Date of revision:
Handle: RePEc:hhs:vxcafo:2009_010

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Postal: Centre for Labour Market Policy Research (CAFO), Dept of Economics and Statistics, School of Management and Economics, Växjö University, SE 351 95 Växjö, Sweden
Phone: +46 470 70 87 64
Web page: http://www.vxu.se/ehv/english/research/research_fields/cafo/
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Related research
Keywords: Liquidity; Scandinavian stock markets; Forecasting; Out-of-sample tests.;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

This paper has been announced in the following NEP Reports:

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