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Return dispersion, stock market liquidity and aggregate economic activity

Author

Listed:
  • Stavros Degiannakis

    (Bank of Greece)

  • Andreas Andrikopoulos

    (University of the Aegean)

  • Timotheos Angelidis

    (University of Peloponnese)

  • Christos Floros

    (Technological Educational Institute of Crete and Hellenic Open University)

Abstract
This paper examines the effect of return dispersion on the dynamics of stock market liquidity, risk and return. Moreover, the importance of return dispersion in forecasting aggregate economic activity is rediscovered in the context of a regime switching model that accounts for stock market fluctuations and their association with the state of the economy. We find that there is a bidirectional, Granger-causal association between illiquidity and return dispersion in the U.S. stock market. The empirical results show that stock returns can help us predict both realized volatility as well as return dispersion. We report that there is a significant relation between economic conditions and the risk measures (return dispersion and realized volatility).

Suggested Citation

  • Stavros Degiannakis & Andreas Andrikopoulos & Timotheos Angelidis & Christos Floros, 2013. "Return dispersion, stock market liquidity and aggregate economic activity," Working Papers 166, Bank of Greece.
    • Handle: RePEc:bog:wpaper:166
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    File URL: http://www.bankofgreece.gr/BogEkdoseis/Paper2013166.pdf
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    References listed on IDEAS

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    Cited by:

    1. Switzer, Lorne N. & Picard, Alan, 2016. "Stock market liquidity and economic cycles: A non-linear approach," Economic Modelling, Elsevier, vol. 57(C), pages 106-119.

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    More about this item

    Keywords

    Illiquidity; Aggregate Economic Activity; Realized Volatility; Regime Switching; Return Dispersion; Stock Market Liquidity.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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