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Monetary policy and its impact on stock market liquidity: Evidence from the euro zone

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Author Info

  • Octavio Fernandez-Amador

    ()

  • Martin Gächter

    ()

  • Martin Larch

    ()

  • Georg Peter

    ()

Abstract

The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. To capture effects both at the micro and macro level of stock markets, we apply panel estimations and vector autoregressive models. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of stock market liquidity in the German, French and Italian markets. These findings are robust for seven proxies of liquidity and two measures of monetary policy.

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Bibliographic Info

Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2011-06.

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Length: 39
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:inn:wpaper:2011-06

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Keywords: Stock liquidity; monetary policy; euro zone;

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  1. Allaudeen Hameed & Wenjin Kang & S. Viswanathan, 2010. "Stock Market Declines and Liquidity," Journal of Finance, American Finance Association, vol. 65(1), pages 257-293, 02.
  2. Hasbrouck, Joel, 2007. "Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading," OUP Catalogue, Oxford University Press, number 9780195301649.
  3. Huberman, Gur & Halka, Dominika, 2001. "Systematic Liquidity," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 24(2), pages 161-78, Summer.
  4. Naes, Randi & Skjeltorp, Johannes & Odegaard, Bernt Arne, 2008. "Liquidity and the Business Cycle," UiS Working Papers in Economics and Finance 2009/1, University of Stavanger.
  5. Goyenko, Ruslan Y. & Ukhov, Andrey D., 2009. "Stock and Bond Market Liquidity: A Long-Run Empirical Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 189-212, February.
  6. Andrea L. Eisfeldt, 2004. "Endogenous Liquidity in Asset Markets," Journal of Finance, American Finance Association, vol. 59(1), pages 1-30, 02.
  7. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  8. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  9. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, vol. 92(2), pages 153-181, May.
  10. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York.
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Cited by:
  1. Florackis, Chris & Kostakis, Alexandros & Kontonikas, Alexandros, 2011. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," SIRE Discussion Papers 2011-31, Scottish Institute for Research in Economics (SIRE).

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