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Predicting US recessions with stock market illiquidity

Predicting US recessions with stock market illiquidity 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.” http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B.E. Journal of Macroeconomics de Gruyter

Predicting US recessions with stock market illiquidity

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Publisher
de Gruyter
Copyright
Copyright © 2016 by the
ISSN
2194-6116
eISSN
1935-1690
DOI
10.1515/bejm-2015-0009
Publisher site
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Abstract

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.”

Journal

The B.E. Journal of Macroeconomics – de Gruyter

Published: Jan 1, 2016

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