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Return dispersion, stock market liquidity and aggregate economic activity

Listed author(s):
  • Stavros Degiannakis

    ()

    (Bank of Greece)

  • Andreas Andrikopoulos

    (University of the Aegean)

  • Timotheos Angelidis

    (University of Peloponnese)

  • Christos Floros

    (Technological Educational Institute of Crete and Hellenic Open University)

This paper examines the effect of return dispersion on the dynamics of stock market liquidity, risk and return. Moreover, the importance of return dispersion in forecasting aggregate economic activity is rediscovered in the context of a regime switching model that accounts for stock market fluctuations and their association with the state of the economy. We find that there is a bidirectional, Granger-causal association between illiquidity and return dispersion in the U.S. stock market. The empirical results show that stock returns can help us predict both realized volatility as well as return dispersion. We report that there is a significant relation between economic conditions and the risk measures (return dispersion and realized volatility).

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File URL: http://www.bankofgreece.gr/BogEkdoseis/Paper2013166.pdf
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Paper provided by Bank of Greece in its series Working Papers with number 166.

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Length: 30
Date of creation: Nov 2013
Handle: RePEc:bog:wpaper:166
Contact details of provider: Web page: http://www.bankofgreece.gr

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