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US Market Liquidity and Its Macroeconomic and Financial Implications: Constructing a Composite Liquidity Index Using Dynamic Factor Models
Author/Artist
Cassard, Michel
[Browse]
Format
Senior thesis
Language
English
Description
95 pages
Availability
Available Online
Full text:
DataSpace
Details
Advisor(s)
Watson, Mark W.
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Department
Princeton University. Department of Economics
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Class year
2016
Summary note
This paper uses dynamic factor model estimation to create a novel index for US xed income nancial market liquidity. This liquidity measure spans the dimensions of liquidity and consider its dynamics. The index o ers insight into the current debate between policymakers and the private sector regarding the state of liquidity in US markets since the recent nancial crisis. The liquidity index depicts a new, lower liquidity level with higher liquidity volatility com- pared to pre-crisis, a result that had not been shown empirically before. The liquidity index is then incorporated into a large-scale factor augmented vector autoregressive model for US real and financial markets. This estimation offers some of the first quantitative insight into the relationship between liquidity and a rich set of US variables.
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