Abstract
In this paper, we empirically investigate the role of stock market illiquidity shocks, stemming from Amihud’s illiquidity measure, in explaining U.S. macroeconomic fluctuations from 1973 to 2018. We find that the impact of illiquidity shocks on economic activity is substantial, and historical decomposition analysis shows that cumulative illiquidity shocks were an essential contributor to the prolonged economic slump of the Great Recession. Moreover, our identified illiquidity shocks represent a distinct source of macroeconomic instability. This suggests that illiquidity shocks, measured by the stock price impacts, may contain more information than other types of shocks in recent studies, such as financial shocks and uncertainty shocks.
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.