Determinants of stock market liquidity – a macroeconomic perspective

Priyanka Naik · Y.V. Reddy

15 citations0/0 files storedMacroeconomics and Finance in Emerging Market Economies

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

This study examines the impact of macroeconomic indicators on the liquidity of the Indian stock market by using the Granger Causality, Vector Auto-Regressive Model, and Impulse Response Functions. Numerous macroeconomic indicators were analysed at monthly and quarterly frequencies for their effect on the liquidity of NIFTY 500 stocks measured across four facets, i.e. depth, breadth, immediacy, and tightness. The study reveals that the tightness facet of liquidity is primarily affected by the indicators and further concludes that higher foreign investment inflows and gold prices impair the aggregate liquidity. In contrast, a surge in money supply strengthens the stock market liquidity.

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References

2002Illiquidity and stock returns: cross-section and time-series effects 1986Asset pricing and the bid-ask spread 1991Disclosure, Liquidity, and the Cost of Capital 2005Asset pricing with liquidity risk 2000Commonality in liquidity 2001Market Liquidity and Trading Activity 2009Do liquidity measures measure liquidity?☆2007Liquidity and Expected Returns: Lessons from Emerging Markets

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