Stock Market Liquidity and the Macroeconomy: Evidence from Japan, Issues 2005-2006
International Monetary Fund, Jan 1, 2005 - Liquidity (Economics) - 28 pages
In a liquid financial market, investors are able to sell large blocks of assets without substantially changing the price. We document a steep drop in the liquidity of the Japanese stock market in the post-bubble period and a steep rise in liquidity risk. We find that, during Japan's deflationary period, firms with more liquid balance sheets were less exposed to stock market liquidity risk, while slowly growing firms were highly exposed to liquidity shocks. Also, aggregate liquidity had macroeconomic effects on aggregate demand through its effect on money demand.
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CrossSectional Evidence on Market Liquidity and Growth
12 lags 9 10 Response aggregate market capitalization aggregate market liquidity approximately Asset Ratio assets in 1995 Assets to Assets balance sheets banking risk billion yen call money rate decline in liquidity Descriptive Statistics divided by Total effects equity markets error bands estimate excess returns exposure to liquidity financial markets fixed assets heteroscedasticity interest rates investors Japan premium Japanese stock market left panel liquid assets liquidity exposure Liquidity Measure liquidity risk macroeconomic market liquidity shocks market makers market returns mbase measure of liquidity monetary base number of shares one-standard deviation increase panel of Figure panel shows percent critical value percent level quantitative easing real balances regress Response of CALL Response of LIQUIDITY Response of MP Response of TOPIX return reversals short-term debt Short-term Loans standard deviation stock market bubble stock market index stock market liquidity stock returns sub-periods time-series Tokyo Stock Exchange total assets trend term