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The impact of policy responses on stock liquidity

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  • Thomas Busch
  • Thorsten Lehnert

Abstract

The collapse of Lehman Brothers in 2008 marked the peak of a financial crisis that is affecting the entire world of finance. This period is characterized by increasing fear of further defaults by corporations (including banks) or even by countries. In reaction, investors began shifting their assets to more stable and secure investments and this resulted in stock market crashes. Various policy interventions were initiated to restore stability. In this article, we analyse the impact of these interventions on stock liquidity, proxied by a new liquidity measure. The interventions, which we consider, are published by the Federal Reserve Bank (FED) in the form of a crisis timeline. Here, they are further combined to the following categories: bank liability guarantees, liquidity and rescue interventions, unconventional monetary policy and other market interventions. The results indicate that the market reacts positively to liquidity and rescue interventions, whereas bank liability guarantees reduced stock liquidity. In addition, we show that international events have a significant impact on the domestic market. By analysing the spreads of different trading volumes, an asymmetric effect can be detected, where the impact on lower trading volumes is substantially more pronounced compared to higher trading volumes.

Suggested Citation

  • Thomas Busch & Thorsten Lehnert, 2014. "The impact of policy responses on stock liquidity," Applied Economics Letters, Taylor & Francis Journals, vol. 21(12), pages 842-845, August.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:12:p:842-845
    DOI: 10.1080/13504851.2014.892193
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    References listed on IDEAS

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    1. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2002. "Order imbalance, liquidity, and market returns," Journal of Financial Economics, Elsevier, vol. 65(1), pages 111-130, July.
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    3. Aït-Sahalia, Yacine & Andritzky, Jochen & Jobst, Andreas & Nowak, Sylwia & Tamirisa, Natalia, 2012. "Market response to policy initiatives during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 162-177.
    4. Michael R King, 2009. "Time to buy or just buying time? The market reaction to bank rescue packages," BIS Working Papers 288, Bank for International Settlements.
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    Cited by:

    1. João Paulo Vieito & Wing-Keung Wong & Zhen-Zhen Zhu, 2016. "Could the global financial crisis improve the performance of the G7 stocks markets?," Applied Economics, Taylor & Francis Journals, vol. 48(12), pages 1066-1080, March.
    2. Priyanka Naik & Y. V. Reddy, 2021. "Stock Market Liquidity: A Literature Review," SAGE Open, , vol. 11(1), pages 21582440209, January.
    3. Apergis, Nicholas & Dastidar, Sayantan Ghosh, 2024. "Local stock liquidity and local factors: Fresh evidence from US firms across states," Research in International Business and Finance, Elsevier, vol. 67(PA).

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