Abstract
In this paper, we investigate the dynamic link between recessions and stock market liquidity by examining the predictive content of illiquidity for US recessions. After controlling for other commonly featured recession predictors such as term spreads and credit spreads, we find that the illiquidity measure proposed by (Amihud, Y. 2002. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets 5: 375–340) has strong power in predicting recessions. Moreover, the predictability of the illiquidity measure of small firms is found to be stronger than that of large firms, which supports the hypothesis of “flight to liquidity.”
Chia-Yi Yen
Ph.D. Candidate in Finance
Chia-Yi Yen is currently a finance Ph.D. candidate at the Mannheim Business School in Germany. Her research interest lies in empirical macro finance, mutual funds, and corporate governance. She has published empirical macro finance papers on decent field journals and diligently worked on a number of research projects. Prior to her doctoral studies, she worked as a financial engineer in the fund industry and a data science consultant for financial institutions.