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Liquidity, Efficiency and the 2007-2008 Global Financial Crisis

Author

Listed:
  • Sergio Bianchi

    (Deptartment of Finance and Risk Engineering, Tandon School of Engineering, New York University)

  • Massimiliano Frezza

    (QuantLAB, Deptartment of Economics and Law, University of Cassino and Southern Lazio)

Abstract

We focus on the relationship between liquidity and market efficiency, and investigate the behavior of three stock market indexes (S&P500, Nasdaq and DAX) before, during and after the global financial crisis. We find that, once accounted for the scale, the two attributes are strongly related and empirical evidence is provided that, when market efficiency is measured through the pointwise regularity of the price, it is a better forecaster of illiquidity than vice versa. We also find that the variation of the illiquidity premium declined to zero during the unconventional interventions that the Federal Reserve launched to face the credit crunch.

Suggested Citation

  • Sergio Bianchi & Massimiliano Frezza, 2018. "Liquidity, Efficiency and the 2007-2008 Global Financial Crisis," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 375-404, November.
    • Handle: RePEc:cuf:journl:y:2018:v:19:i:2:bianchi:frezza
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    More about this item

    Keywords

    Liquidity; Efficiency; Pointwise Regularity; Global Financial Crisis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises

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