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Stock Market Liquidity and the Macroeconomy

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  • Woon Gyu Choi
  • David Cook

Abstract

In a liquid financial market, investors are able to sell large blocks of assets without substantially changing the price. We document a steep drop in the liquidity of the Japanese stock market in the post-bubble period and a steep rise in liquidity risk. We find that, during Japan''s deflationary period, firms with more liquid balance sheets were less exposed to stock market liquidity risk, while slowly growing firms were highly exposed to liquidity shocks. Also, aggregate liquidity had macroeconomic effects on aggregate demand through its effect on money demand.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/6.

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Length: 28
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/6

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References

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  1. Kazuo Ueda, 1993. "A Comparative Perspective on Japanese Monetary Policy: Short-Run Monetary Control and the Transmission Mechanism," NBER Chapters, National Bureau of Economic Research, Inc, in: Japanese Monetary Policy, pages 7-30 National Bureau of Economic Research, Inc.
  2. Ahn, Hee-Joon & Cai, Jun & Hamao, Yasushi & Ho, Richard Y. K., 2002. "The components of the bid-ask spread in a limit-order market: evidence from the Tokyo Stock Exchange," Journal of Empirical Finance, Elsevier, Elsevier, vol. 9(4), pages 399-430, November.
  3. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(3), pages 642-685, June.
  4. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, American Finance Association, vol. 59(4), pages 1777-1804, 08.
  5. Kristin Forbes, 2000. "The Asian Flu and Russian Virus: Firm-level Evidence on How Crises are Transmitted Internationally," NBER Working Papers 7807, National Bureau of Economic Research, Inc.
  6. Yasushi Hamao & Jianping Mei & Yexiao Xu, 2003. "Idiosyncratic Risk and the Creative Destruction in Japan," NBER Working Papers 9642, National Bureau of Economic Research, Inc.
  7. Takatoshi Ito & Kimie Harada, 2000. "Japan Premium and Stock Prices: Two Mirrors of Japanese Banking Crises," NBER Working Papers 7997, National Bureau of Economic Research, Inc.
  8. Nagayasu, Jun, 2003. "A re-examination of the Japanese money demand function and structural shifts," Journal of Policy Modeling, Elsevier, Elsevier, vol. 25(4), pages 359-375, June.
  9. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, Elsevier, vol. 52(1), pages 3-46, April.
  10. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, Elsevier, vol. 17(2), pages 223-249, December.
  11. Sekine, Toshitaka, 1998. "Financial Liberalization, the Wealth Effect, and the Demand for Broad Money in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(1), pages 35-55, May.
  12. Robert L. Hetzel, 2004. "Price stability and Japanese monetary policy," Working Paper, Federal Reserve Bank of Richmond 04-01, Federal Reserve Bank of Richmond.
  13. Hetzel, Robert-L, 2004. "Price Stability and Japanese Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(3), pages 1-23, October.
  14. Takatoshi Ito, 1991. "The Japanese Economy," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262090295, December.
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Cited by:
  1. David Cook & Woon Gyu Choi, 2007. "Financial Market Risk and U.S. Money Demand," IMF Working Papers 07/89, International Monetary Fund.
  2. Vladimir Benic & Ivna Franic, 2008. "Stock Market Liquidity: Comparative Analysis of Croatian and Regional Markets," Financial Theory and Practice, Institute of Public Finance, Institute of Public Finance, vol. 32(4), pages 477-498.
  3. Söderberg, Jonas, 2008. "Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia," CAFO Working Papers, Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University 2009:10, Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University.
  4. Söderberg, Jonas, 2008. "Liquidity on the Scandinavian Order-driven Stock Exchanges," CAFO Working Papers, Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University 2009:11, Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University.

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