Determinants of stock market liquidity – a macroeconomic perspective

Abstract

This study examines the impact of macroeconomic indicators on the liquidity of the Indian stock market by using the Granger Causality, Vector Auto-Regressive Model, and Impulse Response Functions. Numerous macroeconomic indicators were analysed at monthly and quarterly frequencies for their effect on the liquidity of NIFTY 500 stocks measured across four facets, i.e. depth, breadth, immediacy, and tightness. The study reveals that the tightness facet of liquidity is primarily affected by the indicators and further concludes that higher foreign investment inflows and gold prices impair the aggregate liquidity. In contrast, a surge in money supply strengthens the stock market liquidity.