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Global Liquidity, Risk Premiums and Growth Opportunities

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  • Gianni De Nicoló
  • Iryna V. Ivaschenko
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    Abstract

    This paper constructs new indicators of liquidity for equity, bond and money markets in major advanced and emerging market countries, documents their evolution and comovements, and assesses the extent to which such measures are determinants of selected spreads and proxy measures of countries'' growth opportunities. Three main results obtain. First, there is evidence of an historical increase in market liquidity since the early 1990s, in part as a result of advances in international financial integration, but markets have been increasingly exposed to global systemic liquidity shocks. Second, liquidity indicators appear to be important determinants of bond spreads in advanced economies and EMBI spreads in emerging markets. Third, improvements in market liquidity have significant real effects, as liquidity indicators have a significant positive impact on proxy measures of countries'' growth opportunities.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/52.

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    Length: 35
    Date of creation: 01 Mar 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/52

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    Related research

    Keywords: Liquidity; Stock markets; Developed countries; Emerging markets; Economic growth; Economic models; bond; equity markets; bond markets; bond spreads; equity market; financial markets; government bond; bonds; money markets; covariances; bond market; money market; correlations; equations; financial economics; stock market; correlation; time series; stock returns; bond premiums; bond spread; equation; stock market liquidity; logarithm; standard errors; covariance; hedge; proxy measure; probability; financial market; bond yield; statistics; government bond market; explanatory power; hedge funds; bond indices; survey; government bond markets; descriptive statistics; standard deviation; samples; random variable; domestic money markets; financial institutions; statistical models; international financial markets; sample size; stock indices; domestic government bond; government bonds; autocorrelation; financial market development; domestic money market; emerging bond markets; significance levels; liquid markets; liquidity in bond markets; financial cycles; bond yields; financial instruments; money market instruments;

    This paper has been announced in the following NEP Reports:

    References

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    1. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
    2. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    3. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
    4. Goyenko, Ruslan & Sarkissian, Sergei, 2010. "Flight to Liquidity and Global Equity Returns," MPRA Paper 27546, University Library of Munich, Germany.
    5. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
    6. Thomas Ho & Hans Stoll, . "Optimal Dealer Pricing Under Transactions and Return Uncertainty," Rodney L. White Center for Financial Research Working Papers 27-79, Wharton School Rodney L. White Center for Financial Research.
    7. Bekaert, Geert & Harvey, Campbell & Lundblad, Christian T., 2006. "Liquidity and Expected Returns: Lessons from Emerging Markets," CEPR Discussion Papers 5946, C.E.P.R. Discussion Papers.
    8. Stephen Morris & Hyun Song Shin, 2004. "Liquidity Black Holes," Review of Finance, Springer, vol. 8(1), pages 1-18.
    9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    10. Iryna V. Ivaschenko & Gianni De Nicoló, 2008. "Financial Integration and Risk-Adjusted Growth Opportunities," IMF Working Papers 08/126, International Monetary Fund.
    11. Huberman, G. & Halka, D., 1999. "Systematic Liquidity," Papers 99-9, Columbia - Graduate School of Business.
    12. Acharya, Viral V & Pedersen, Lasse Heje, 2004. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 4718, C.E.P.R. Discussion Papers.
    13. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    14. Geert Bekaert & Campbell R. Harvey & Christian Lundblad & Stephan Siegel, 2004. "Global Growth Opportunities and Market Integration," NBER Working Papers 10990, National Bureau of Economic Research, Inc.
    15. Campbell, John Y & Grossman, Sanford J & Wang, Jiang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 905-39, November.
    16. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
    17. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    18. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jan).
    19. Jennifer Huang & Jiang Wang, 2008. "Liquidity and Market Crashes," NBER Working Papers 14013, National Bureau of Economic Research, Inc.
    20. Amihud, Yakov & Mendelson, Haim, 1987. " Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-53, July.
    21. Korajczyk, Robert A. & Sadka, Ronnie, 2008. "Pricing the commonality across alternative measures of liquidity," Journal of Financial Economics, Elsevier, vol. 87(1), pages 45-72, January.
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