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Stock liquidity and the Taylor rule

Listed author(s):
  • Jiang, Lei
Registered author(s):

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0927539814000693
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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 28 (2014)
Issue (Month): C ()
Pages: 202-214

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Handle: RePEc:eee:empfin:v:28:y:2014:i:c:p:202-214
DOI: 10.1016/j.jempfin.2014.07.001
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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