IDEAS home Printed from https://ideas.repec.org/p/inn/wpaper/2011-06.html
   My bibliography  Save this paper

Monetary policy and its impact on stock market liquidity: Evidence from the euro zone

Author

Listed:
  • Octavio Fernandez-Amador
  • Martin Gächter
  • Martin Larch
  • Georg Peter

Abstract

The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. To capture effects both at the micro and macro level of stock markets, we apply panel estimations and vector autoregressive models. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of stock market liquidity in the German, French and Italian markets. These findings are robust for seven proxies of liquidity and two measures of monetary policy.

Suggested Citation

  • Octavio Fernandez-Amador & Martin Gächter & Martin Larch & Georg Peter, 2011. "Monetary policy and its impact on stock market liquidity: Evidence from the euro zone," Working Papers 2011-06, Faculty of Economics and Statistics, Universität Innsbruck.
    • Handle: RePEc:inn:wpaper:2011-06
    as

    Download full text from publisher

    File URL: https://www2.uibk.ac.at/downloads/c4041030/wpaper/2011-06.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    2. Hasbrouck, Joel, 2007. "Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading," OUP Catalogue, Oxford University Press, number 9780195301649, Decembrie.
    3. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    4. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York.
    5. Allaudeen Hameed & Wenjin Kang & S. Viswanathan, 2010. "Stock Market Declines and Liquidity," Journal of Finance, American Finance Association, vol. 65(1), pages 257-293, February.
    6. Naes, Randi & Skjeltorp, Johannes & Odegaard, Bernt Arne, 2008. "Liquidity and the Business Cycle," UiS Working Papers in Economics and Finance 2009/1, University of Stavanger.
    7. Amihud, Yakov & Mendelson, Haim & Pedersen, Lasse Heje, 2006. "Liquidity and Asset Prices," Foundations and Trends(R) in Finance, now publishers, vol. 1(4), pages 269-364, February.
    8. Goyenko, Ruslan Y. & Ukhov, Andrey D., 2009. "Stock and Bond Market Liquidity: A Long-Run Empirical Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 189-212, February.
    9. Andrea L. Eisfeldt, 2004. "Endogenous Liquidity in Asset Markets," Journal of Finance, American Finance Association, vol. 59(1), pages 1-30, February.
    10. Söderberg, Jonas, 2008. "Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia," CAFO Working Papers 2009:10, Linnaeus University, Centre for Labour Market Policy Research (CAFO), School of Business and Economics.
    11. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, vol. 92(2), pages 153-181, May.
    12. Huberman, Gur & Halka, Dominika, 2001. "Systematic Liquidity," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(2), pages 161-178, Summer.
    13. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Florackis, Chris & Kostakis, Alexandros & Kontonikas, Alexandros, 2011. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," SIRE Discussion Papers 2011-31, Scottish Institute for Research in Economics (SIRE).
    2. Mishra, Ajay Kumar & Parikh, Bhavik & Spahr, Ronald W., 2020. "Stock market liquidity, funding liquidity, financial crises and quantitative easing," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 456-478.
    3. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," Working Papers 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Byomakesh Debata & Jitendra Mahakud, 2018. "Interdependence between Monetary Policy and Stock Liquidity: A Panel VAR Approach," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 12(4), pages 387-413, November.
    2. Fernández-Amador, Octavio & Gächter, Martin & Larch, Martin & Peter, Georg, 2013. "Does monetary policy determine stock market liquidity? New evidence from the euro zone," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 54-68.
    3. Ijaz Ur Rehman & Nurul Shahnaz Mahdzan & Rozaimah Zainudin, 2016. "Is the relationship between macroeconomy and stock market liquidity mutually reinforcing? Evidence from an emerging market," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 9(3), pages 294-316.
    4. Byomakesh Debata & Jitendra Mahakud, 2018. "Economic policy uncertainty and stock market liquidity," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 10(1), pages 112-135, April.
    5. Chiu, Yen-Chen, 2020. "Macroeconomic uncertainty, information competition, and liquidity," Finance Research Letters, Elsevier, vol. 34(C).
    6. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    7. K. Lebedeva, 2015. "An Empirical Analysis of the Russian Financial Markets’ Liquidity and Returns," Review of Business and Economics Studies // Review of Business and Economics Studies, Финансовый Университет // Financial University, vol. 3(3), pages 5-31.
    8. de Jong, F.C.J.M. & Driessen, J.J.A.G., 2015. "Can large long-term investors capture illiquidity premiums," Other publications TiSEM 9c92b978-0099-44d3-9aab-8, Tilburg University, School of Economics and Management.
    9. Moshirian, Fariborz & Qian, Xiaolin & Wee, Claudia Koon Ghee & Zhang, Bohui, 2017. "The determinants and pricing of liquidity commonality around the world," Journal of Financial Markets, Elsevier, vol. 33(C), pages 22-41.
    10. Vayanos, Dimitri & Wang, Jiang, 2012. "Market liquidity - theory and empirical evidence," LSE Research Online Documents on Economics 119044, London School of Economics and Political Science, LSE Library.
    11. Jiang, Lei, 2014. "Stock liquidity and the Taylor rule," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 202-214.
    12. Peter Christoffersen & Ruslan Goyenko & Kris Jacobs & Mehdi Karoui, 2018. "Illiquidity Premia in the Equity Options Market," Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 811-851.
    13. Chen, Jiayuan & Gong, Di & Muckley, Cal, 2020. "Stock market illiquidity, bargaining power and the cost of borrowing," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 181-206.
    14. Martin Hoesli & Anjeza Kadilli & Kustrim Reka, 2017. "Commonality in Liquidity and Real Estate Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 55(1), pages 65-105, July.
    15. Lang, Mark & Maffett, Mark, 2011. "Transparency and liquidity uncertainty in crisis periods," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 101-125.
    16. Nyborg, Kjell G. & Östberg, Per, 2014. "Money and liquidity in financial markets," Journal of Financial Economics, Elsevier, vol. 112(1), pages 30-52.
    17. Goyenko, Ruslan & Sarkissian, Sergei, 2010. "Flight to Liquidity and Global Equity Returns," MPRA Paper 27546, University Library of Munich, Germany.
    18. Qin Lei & Xuewu Wang, 2012. "Flight to liquidity due to heterogeneity in investment horizon," China Finance Review International, Emerald Group Publishing, vol. 2(2), pages 316-350, August.
    19. Belkhir, Mohamed & Saad, Mohsen & Samet, Anis, 2020. "Stock extreme illiquidity and the cost of capital," Journal of Banking & Finance, Elsevier, vol. 112(C).
    20. Nina Karnaukh & Angelo Ranaldo & Paul Söderlind, 2015. "Understanding FX Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 28(11), pages 3073-3108.

    More about this item

    Keywords

    Stock liquidity; monetary policy; euro zone;
    All these keywords.

    JEL classification:

    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inn:wpaper:2011-06. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Janette Walde (email available below). General contact details of provider: https://edirc.repec.org/data/fuibkat.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.