Scandinavian Working Papers in Economics

CAFO Working Papers,
Linnaeus University, Centre for Labour Market Policy Research (CAFO), School of Business and Economics

No 2009:10: Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia

Jonas Söderberg ()
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Jonas Söderberg: Centre for Labour Market Policy Research (CAFO), Postal: Centre for Labour Market Policy Research (CAFO), Dept of Economics and Statistics, School of Management and Economics, Växjö University , SE 351 95 Växjö, Sweden

Abstract: This paper evaluates 14 macroeconomic variables’ ability to forecast changes in monthly liquidity on the Scandinavian order-driven stock exchanges. Every macroeconomic variable is evaluated both out-of-sample and in-sample and against three different benchmark models of market variables and asymmetries concerning up and down markets. Policy rate on Copenhagen, broad money growth on Oslo, and short-term interest rate and flows from mutual funds on Stockholm significantly improve the out-of-sample forecasts of liquidity at these exchanges. However, most proposed macroeconomic variables can be rejected as forecasters of liquidity on the Scandinavian stock exchanges. There are many variables that predict in-sample liquidity that do not forecast out-of-sample. This stresses the importance of conducting out-of-sample tests when examining whether macroeconomic variables predict liquidity. In addition, this is the first paper confirming that stock market liquidity can be forecast out-of-sample.

Keywords: Liquidity; Scandinavian stock markets; Forecasting; Out-of-sample tests.

JEL-codes: G12; G17; G18

62 pages, December 1, 2008

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