Abstract
This research studies the effects of macroeconomic factors on liquidity, focusing on the pricing of liquidity. By applying cross-sectional tests, we obtain the monthly price of liquidity. Overall, the results show that the growth rate in industrial production has significant contemporaneous effects on the price of liquidity. Interestingly, macroeconomic factors, especially the rate of growth in industrial production, have significant predictive power on liquidity pricing when the market is in recession. This study provides evidence that the pricing of liquidity is time-varying and can be partially explained by business cycles and the rate of growth in industrial production. The findings will also help us understand the sources of commonality of liquidity.
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