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Global Liquidity, Risk Premiums and Growth Opportunities

  • Gianni De Nicolò
  • Iryna Ivaschenko
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    This paper constructs new indicators of liquidity for equity, bond and money markets in major advanced and emerging market countries, documents their evolution and co-movements, 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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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-03/cesifo1_wp2598.pdf
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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2598.

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    Date of creation: 2009
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    Handle: RePEc:ces:ceswps:_2598
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    1. Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    14. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    15. Goyenko, Ruslan & Sarkissian, Sergei, 2010. "Flight to Liquidity and Global Equity Returns," MPRA Paper 27546, University Library of Munich, Germany.
    16. 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).
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    19. 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.
    20. Iryna V. Ivaschenko & Gianni De Nicolo, 2008. "Financial Integration and Risk-Adjusted Growth Opportunities," IMF Working Papers 08/126, International Monetary Fund.
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