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Stock liquidity and the Taylor rule

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  • Jiang, Lei

Abstract

This paper examines how stock market liquidity and commonality in liquidity are impacted by real-time output gap and inflation, as these macroeconomic variables have been shown to be the main drivers of monetary policy according to the Taylor rule. We show that an increase in the output gap and inflation lowers stock liquidity and increases commonality in liquidity, since it points to a contractionary monetary policy and is likely to lead to a decline in the liquidity providers' funding liquidity. This effect is larger for stocks with low market capitalization and low liquidity.

Suggested Citation

  • Jiang, Lei, 2014. "Stock liquidity and the Taylor rule," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 202-214.
  • Handle: RePEc:eee:empfin:v:28:y:2014:i:c:p:202-214
    DOI: 10.1016/j.jempfin.2014.07.001
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    Cited by:

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    2. Ding, Xiaoya (Sara) & Ni, Yang & Zhong, Ligang, 2016. "Free float and market liquidity around the world," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 236-257.
    3. Dladla, Pholile & Malikane, Christopher, 2019. "Stock return predictability: Evidence from a structural model," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 412-424.

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    More about this item

    Keywords

    Liquidity; Commonality in liquidity; Taylor rule;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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