Predicting US recessions with stock market illiquidity

Shiu Sheng Chen, Yu Hsi Chou*, Chia Yi Yen

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)


In this paper, we investigate the dynamic link between recessions and stock market liquidity by examining the predictive content of illiquidity for US recessions. After controlling for other commonly featured recession predictors such as term spreads and credit spreads, we find that the illiquidity measure proposed by (Amihud, Y. 2002. "Illiquidity and Stock Returns: Cross-Section and Time-Series Effects." Journal of Financial Markets 5: 375-340) has strong power in predicting recessions. Moreover, the predictability of the illiquidity measure of small firms is found to be stronger than that of large firms, which supports the hypothesis of "flight to liquidity.

Original languageEnglish
Pages (from-to)93-123
Number of pages31
JournalB.E. Journal of Macroeconomics
Issue number1
Publication statusPublished - 2016 Jan 1
Externally publishedYes


  • Probit model
  • Recession
  • Stock market illiquidity

ASJC Scopus subject areas

  • Economics and Econometrics


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