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RETURN DISPERSION, STOCK MARKET LIQUIDITY AND AGGREGATE ECONOMIC ACTIVITY

 

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).

 

JEL classification: G10; C23; C32; C40; C51.

Keywords: Illiquidity; Aggregate Economic Activity; Realized Volatility; Regime Switching; Return Dispersion; Stock Market Liquidity.

 

Acknowledgement: We would like to thank Dr. Heather Gibson for her constructive suggestions which helped us to improve the clarity of the paper. The views expressed are those of the authors and should not be interpreted as those of their respective institutions. The authors are solely responsible for any remaining errors and deficiencies.

 

 

 

Correspondence:

Stavros Degiannakis

Bank of Greece

21, El. Venizelos Ave.

10250 Athens, Greece

Tel.: 0030-210-3202371

Email: sdegiannakis@bankofgreece.gr


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