Florackis, C and Kontonikas, A and Kostakis, A (2014) Stock market liquidity and macro-liquidity shocks: Evidence from the 2007–2009 financial crisis. Journal of International Money and Finance, 44 (C). pp. 97-117. DOI https://doi.org/10.1016/j.jimonfin.2014.02.002
Florackis, C and Kontonikas, A and Kostakis, A (2014) Stock market liquidity and macro-liquidity shocks: Evidence from the 2007–2009 financial crisis. Journal of International Money and Finance, 44 (C). pp. 97-117. DOI https://doi.org/10.1016/j.jimonfin.2014.02.002
Florackis, C and Kontonikas, A and Kostakis, A (2014) Stock market liquidity and macro-liquidity shocks: Evidence from the 2007–2009 financial crisis. Journal of International Money and Finance, 44 (C). pp. 97-117. DOI https://doi.org/10.1016/j.jimonfin.2014.02.002
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 and 2012. Specifically, macro-liquidity shocks, which are extracted on the meeting days of the Bank of England Monetary Policy Committee (MPC) 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.
Item Type: | Article |
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Uncontrolled Keywords: | Liquidity shocks; Monetary policy; Market micro-structure; Stock returns |
Subjects: | H Social Sciences > HG Finance |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 18 Nov 2016 13:09 |
Last Modified: | 16 May 2024 16:55 |
URI: | http://repository.essex.ac.uk/id/eprint/18035 |