Abstract
This study presents and empirically tests a simple framework that examines the effects of market liquidity (the ease with which stocks are traded) and funding liquidity (the ease with which market participants can obtain funding) on stock market bubbles. Three key findings emerge from this research. First, negative market and funding liquidity shocks increase the probability of stock market bubbles collapsing. Second, market liquidity has a more prevalent effect on stock bubbles than funding liquidity. Third, liquidity shocks provide warning signals of impending bubble collapses. A trading rule based on recursive forecasts from the aforementioned framework is used to illustrate the economic significance of the liquidity–bubble relationship.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: Journal of International Financial Markets, Institutions and Money
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
