Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 130, Issue 1, Pages 48-73Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2018.05.011
Keywords
Stock market liquidity; Stock return predictability; Macroeconomic forecasts; Transaction costs; Equity premium
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Funding
- Mays Business School at Texas AM University
- CREATES Center for Research in Econometric Analysis of Time Series - Danish National Research Foundation [DNRF78]
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This paper constructs and analyzes various measures of trading costs in US equity markets covering the period 1926-2015. These measures contain statistically and economically significant predictive signals for stock market returns and real economic activity. We decompose illiquidity proxies into a component capturing aggregate volatility and a residual. The predictive content of these components differs in important ways. Specifically, we find strong evidence that the component of illiquidity uncorrelated with volatility forecasts stock market returns. Both the volatility and residual components of illiquidity contain information regarding future economic activity. (C) 2018 Elsevier B.V. All rights reserved.
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