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Stock Market Liquidity, Monetary Policy and the Business Cycle

Author

Listed:
  • Markus Leippold

    (University of Zurich; Swiss Finance Institute)

  • Vincent Wolff

    (University of Zurich - Department of Banking and Finance)

Abstract

Næs, Skjeltorp, and Ødegaard (2011) provide empirical evidence that stock market liquidity contains leading information about future economic activity. Their result suggests a rebalancing of small, increasingly illiquid to large stocks in recession times, an expression of “flight-to-quality”. We show that the relationship no longer holds due to the Fed’s accommodative monetary policy to buoy stock markets in crisis starting in the 1990s. Moreover, we document that liquidity dry-ups in small stocks no longer coincide with recessions. The Fed’s interventions mute the systematic link between monetary conditions and aggregate stock market liquidity’s well-established business cycle component.

Suggested Citation

  • Markus Leippold & Vincent Wolff, 2022. "Stock Market Liquidity, Monetary Policy and the Business Cycle," Swiss Finance Institute Research Paper Series 22-93, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2293
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    More about this item

    Keywords

    Financial Markets and the Macroeconomy; Liquidity; Monetary Policy;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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