Ebook The information content of market liquidity: An empirical analysis of liquidity at the Oslo Stock Exchange
In finance, liquidity is a concept with many interpretations, and many uses. Following the recent financial crisis there has been a huge increase in research on liquidity related topics both with respect to macro liquidity, funding liquidity, the liquidity of different asset classes and markets as well as the flow of funds between different assets and markets.
In this paper we look at the link between equity market liquidity and the real economy. In the discussion of the current financial crisis, much attention has been on the apparent casual effect from a dry up in the liquidity of financial assets to the crisis of the economy. Nes et al. [2009b] show that such links between aggregate stock market liquidity and the macro economy are not new, rather, they have been a stable feature of the US stock market at least since the Second World War. They show, using data for the US from 1947 through 2008, that equity market liquidity is a very good leading indicator of the real economy. We look at similar issues using data from the Norwegian equity market (Oslo Stock Exchange – OSE). We examine the liquidity of the Norwegian equity market represented by the stocks listed on the OSE over the period 1980 through 2008.
The goal of this study is twofold. First, we give a general descriptive analysis of the liquidity and trading activity of the Oslo Stock Exchange (OSE) for the period 1980 through 2008, with particular focus on the crisis period 2007-2008. With respect to the crisis we examine how liquidity and trading activity changed through the crisis for the market as a whole, across important firm risk characteristics (mainly firm size) and for individual industry sectors.
Secondly, we examine in more detail to what degree market liquidity is informative about future economic conditions in Norway. We perform an in-sample analysis where market liquidity is used as a predictor of macroeconomic aggregates such as growth in real GDP, unemployment, credit, consumption and investments. We also do Granger causality tests between the variables, as well as out-of-sample evaluations of simple linear forecasting models where we examine whether liquidity might be of use for predicting macro conditions in real time. In both the in-sample and out-of-sample analysis we compare the performance of market liquidity to other financial predictors.
The structure of the paper is as follows. We start by a brief overview of the current research on equity market liquidity and its links with the macroeconomy before we in section 2 describe the data and the construction of our liquidity measures. In section 3 we provide some descriptive statistics for the variables and examine the time series development in liquidity across the whole sample period 1980-2008 with particular focus on the crisis period. In section 4 we examine the predictive ability of liquidity for several macroeconomic variables both in-sample and out-of-sample. We also examine the causality relation between liquidity and macroeconomic variables. Finally, in section 5 we summarize the results.
Posted in :
