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Stock market liquidity and macro-liquidity shocks: Evidence from the 2007-2009 financial crisis

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  • Chris Florackis
  • Alexandros Kontonikas
  • Alexandros Kostakis‌

Abstract

We develop an empirical framework that links micro-liquidity, macro-liquidity and stock prices. We provide evidence of a strong link between macro-liquidity shocks and the returns of UK stock portfolios constructed on the basis of micro-liquidity measures between 1999- 2012. Specifically, macro-liquidity shocks, which are extracted on the meeting days of the Bank of England Monetary Policy Committee relative to market expectations embedded in 3- month LIBOR futures prices, are transmitted in a differential manner to the cross-section of liquidity-sorted portfolios, with liquid stocks playing the most active role. We also find that there is a significant increase in shares’ trading activity and a rather small increase in their trading cost on MPC meeting days. Finally, our results emphatically document that during the recent financial crisis the shocks-returns relationship has reversed its sign. Interest rate cuts during the crisis were perceived by market participants as a signal of deteriorating economic prospects and reinforced “flight to safety” trading.

Suggested Citation

  • Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis‌, "undated". "Stock market liquidity and macro-liquidity shocks: Evidence from the 2007-2009 financial crisis," Working Papers 2013_13, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2013_13
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    Cited by:

    1. Afonso, António & Arghyrou, Michael G. & Gadea, María Dolores & Kontonikas, Alexandros, 2018. "“Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 1-30.
    2. Eksi, Ozan & Tas, Bedri Kamil Onur, 2017. "Unconventional monetary policy and the stock market’s reaction to Federal Reserve policy actions," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 136-147.
    3. repec:bla:pacecr:v:21:y:2016:i:5:p:560-580 is not listed on IDEAS
    4. repec:kap:fmktpm:v:32:y:2018:i:4:d:10.1007_s11408-018-0320-9 is not listed on IDEAS
    5. repec:eee:finlet:v:23:y:2017:i:c:p:152-164 is not listed on IDEAS
    6. repec:eee:jimfin:v:93:y:2019:i:c:p:277-298 is not listed on IDEAS
    7. repec:eee:reveco:v:49:y:2017:i:c:p:548-567 is not listed on IDEAS
    8. Apergis, Nicholas & Artikis, Panagiotis G. & Kyriazis, Dimitrios, 2015. "Does stock market liquidity explain real economic activity? New evidence from two large European stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 42-64.
    9. Bekiros, Stelios & Hernandez, Jose Arreola & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2015. "Multivariate dependence risk and portfolio optimization: An application to mining stock portfolios," Resources Policy, Elsevier, vol. 46(P2), pages 1-11.
    10. Baumöhl, Eduard & Lyócsa, Štefan, 2017. "Directional predictability from stock market sector indices to gold: A cross-quantilogram analysis," Finance Research Letters, Elsevier, vol. 23(C), pages 152-164.

    More about this item

    Keywords

    Liquidity Shocks; Monetary Policy; Market Micro-Structure; Stock Returns.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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