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Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia

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    This paper evaluates 14 macroeconomic variables’ ability to forecast changes in monthly liquidity on the Scandinavian order-driven stock exchanges. Every macroeconomic variable is evaluated both out-of-sample and in-sample and against three different benchmark models of market variables and asymmetries concerning up and down markets. Policy rate on Copenhagen, broad money growth on Oslo, and short-term interest rate and flows from mutual funds on Stockholm significantly improve the out-of-sample forecasts of liquidity at these exchanges. However, most proposed macroeconomic variables can be rejected as forecasters of liquidity on the Scandinavian stock exchanges. There are many variables that predict in-sample liquidity that do not forecast out-of-sample. This stresses the importance of conducting out-of-sample tests when examining whether macroeconomic variables predict liquidity. In addition, this is the first paper confirming that stock market liquidity can be forecast out-of-sample.

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    Paper provided by Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University in its series CAFO Working Papers with number 2009:10.

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    Length: 62 pages
    Date of creation: 01 Dec 2008
    Date of revision:
    Handle: RePEc:hhs:vxcafo:2009_010
    Contact details of provider: Postal: Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University, SE 351 95 Växjö, Sweden
    Phone: +46 470 70 87 64
    Web page: http://lnu.se/research-groups/cafo?l=en

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