Abstract
In this paper, we investigate the dynamic link between recessions and stock market liquidity by examining the predictive content of illiquidity for US recessions. After controlling for other commonly featured recession predictors such as term spreads and credit spreads, we find that the illiquidity measure proposed by (Amihud, Y. 2002. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets 5: 375–340) has strong power in predicting recessions. Moreover, the predictability of the illiquidity measure of small firms is found to be stronger than that of large firms, which supports the hypothesis of “flight to liquidity.”
Acknowledgments
We would like to thank two anonymous referees, and Chih-Yen Lin for helpful comments and suggestions.
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Supplemental Material:
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Artikel in diesem Heft
- Frontmatter
- Advances
- On the macroeconomic effects of heterogeneous productivity shocks
- Fiscal policy in an open economy
- Understanding entry and exit: a business cycle accounting approach
- Contributions
- Predicting US recessions with stock market illiquidity
- The corruption-inflation nexus: evidence from developed and developing countries
- Credit channel and capital flows: a macroprudential policy tool? Evidence from Turkey
- Optimistic about the future? How uncertainty and expectations about future consumption prospects affect optimal consumer behavior
- Forecasting exchange rates using multivariate threshold models
- Firms’ operational costs, market entry and growth
- Commonalities and cross-country spillovers in macroeconomic-financial linkages
- Identifying conventional and unconventional monetary policy shocks: a latent threshold approach
Artikel in diesem Heft
- Frontmatter
- Advances
- On the macroeconomic effects of heterogeneous productivity shocks
- Fiscal policy in an open economy
- Understanding entry and exit: a business cycle accounting approach
- Contributions
- Predicting US recessions with stock market illiquidity
- The corruption-inflation nexus: evidence from developed and developing countries
- Credit channel and capital flows: a macroprudential policy tool? Evidence from Turkey
- Optimistic about the future? How uncertainty and expectations about future consumption prospects affect optimal consumer behavior
- Forecasting exchange rates using multivariate threshold models
- Firms’ operational costs, market entry and growth
- Commonalities and cross-country spillovers in macroeconomic-financial linkages
- Identifying conventional and unconventional monetary policy shocks: a latent threshold approach