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Market Wide Liquidity Instability in Business Cycles

By Sidharta Chatterjee

Abstract

This paper deals with an existing question; does market liquidity disequilibrium leads to stock market bubble burst? Contemporary research has shown that liquidity is the key driving force behind capital market growth and its sustenance. Stock markets usually react to changes in market-wide liquidity, whose supply-demand cycle fluctuates with investor behavior actions. Market illiquidity due to supply shocks or sudden redemption, does exert strain on the financial markets as of when if too much untenable, lead to market crash. In this paper, we investigate how market-wide fluctuations in liquidity result in return volatilities and stock market return asymmetries as also to prove the notion whether liquidity per se, is the sole driver of stock market growth.

Topics: C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models, E44 - Financial Markets and the Macroeconomy
Year: 2009
OAI identifier: oai:mpra.ub.uni-muenchen.de:18117

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