Abstract
This paper examines the relationship between business cycles and market wide liquidity using a non-linear approach to capture the dynamics of macroeconomic time series. Applying both the Markov switching-regime and the smooth-transition autoregressive models and various proxies for liquidity, this study presents weak evidence that liquidity fundamentals act as leading indicators of future economic conditions. Whether stock market aggregate liquidity can be exploited to predict the future state of the economy remains an open question.
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