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Johannes A. Skjeltorp

Bio: Johannes A. Skjeltorp is an academic researcher from The RiverBank. The author has contributed to research in topics: Market liquidity & Liquidity crisis. The author has an hindex of 15, co-authored 38 publications receiving 1273 citations. Previous affiliations of Johannes A. Skjeltorp include Norges Bank & Erasmus University Rotterdam.

Papers
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Journal ArticleDOI
TL;DR: In this paper, the authors show that changes in the liquidity of the U.S. stock market have been coinciding with changes in real economy at least since the Second World War, and that stock market liquidity is a very good "leading indicator" of the real economy.
Abstract: In the recent financial crisis we saw liquidity in the stock market drying up as a precursor to the crisis in the real economy. We show that such effects are not new; in fact, we find a strong relation between stock market liquidity and the business cycle. We also show that investors' portfolio compositions change with the business cycle and that investor participation is related to market liquidity This suggests that systematic liquidity variation is related to a "flight to quality" during economic down? turns. Overall, our results provide a new explanation for the observed commonality in liquidity. In discussions of the current financial crisis, much is made of the apparent causality between a decline in the liquidity of financial assets and the economic crisis. In this paper we show that such effects are not new; changes in the liquidity of the U.S. stock market have been coinciding with changes in the real economy at least since the Second World War. In fact, stock market liquidity is a very good "leading indicator" of the real economy. Using data for the United States over the period 1947 to 2008, we document that measures of stock market liquidity contain leading information about the real economy, even after controlling for other asset price predictors. Figure 1 provides a time-series plot of one measure of market liquidity, the Amihud (2002) measure, together with the National Bureau of Economic Research (NBER) recession periods (gray bars). This figure illustrates the re? lationship found between stock market liquidity and the business cycle. As can be seen from the figure, liquidity clearly worsens (illiquidity increases) well ahead of the onset of the NBER recessions. Our results are relevant for several strands of the literature. One impor? tant strand is the literature on forecasting economic growth using different asset prices, including interest rates, term spreads, stock returns, and ex? change rates. The forward-looking nature of asset markets makes the use *Randi Naes is at the Norwegian Ministry of Trade and Industry Johannes A. Skjeltorp is at Norges Bank (the Central Bank of Norway). Bernt Arne 0degaard is at the University of Stavanger, Norges Bank, and Norwegian School of Management. We are grateful for comments from an anonymous referee, an associate editor, and our Editor (Campbell Harvey). We also thank Kristian Miltersen, Luis Viceira, and seminar participants at the fourth Annual Central Bank

430 citations

Journal ArticleDOI
TL;DR: In this article, the authors examine empirically the relationship between the demand and supply schedules in a limit order book and the volume volatility relation and show that the number of trades and the price volatility are also related to the slope of the order book.
Abstract: We examine empirically the relationship between the demand and supply schedules in a limit order book and the volume volatility relation. Several empirical studies find support for the hypothesis that the volume-volatility relation is driven by the arrival rate of new information, proxied by the number of transactions. Our results show that the number of trades and the price volatility are also related to the slope of the order book. One possible interpretation for this finding is that the slope of the book is proxying for dispersed beliefs among investors. If so, this would support models where investor heterogeneity intensifies the volume-volatility relation.

121 citations

Journal ArticleDOI
TL;DR: In this paper, the authors identify strong evidence that volume, volatility, and the volume-volatility relation are negatively related to the order book slope and support models where investor heterogeneity intensifies the volume volatility relation.

115 citations

Journal ArticleDOI
TL;DR: In this paper, the authors investigated the validity of the much-used assumptions that stock market returns follow a random walk and are normally distributed and applied the concepts of chaos theory and fractals to examine price variations in the Norwegian and US stock markets.
Abstract: The main objective of this paper is to investigate the validity of the much-used assumptions that stock market returns follow a random walk and are normally distributed. For this purpose the concepts of chaos theory and fractals are applied. Two independent models are used to examine price variations in the Norwegian and US stock markets. The first model used is the range over standard deviation or R/S statistic which tests for persistence or antipersistence in the time series. Both the Norwegian and US stock markets show significant persistence caused by long-run “memory” components in the series. In addition, an average non-periodic cycle of four years is found for the US stock market. These results are not consistent with the random walk assumption. The second model investigates the distributional scaling behaviour of the high-frequency price variations in the Norwegian stock market. The results show a remarkable constant scaling behaviour between different time intervals. This means that there is no intrinsic time scale for the dynamics of stock price variations. The relationship can be expressed through a scaling exponent, describing the development of the distributions as the time scale changes. This description may be important when constructing or improving pricing models such that they coincide more closely with the observed market behaviour. The empirical distributions of high-frequency price variations for the Norwegian stock market is then compared to the Levy stable distribution with the relevant scaling exponent found by using the R/S- and distributional scaling analysis. Good agreement is found between the Levy profile and the empirical distribution for price variations less than ±6 standard deviations, covering almost three orders of magnitude in the data. For probabilities larger than ±6 standard deviations, there seem to be an exponential fall-off from the Levy profile in the tails which indicates that the second-moment may be finite.

95 citations

Journal ArticleDOI
TL;DR: In this paper, the authors use a detailed data set from a large investor in the US equity markets to find evidence that competition from crossing networks is concentrated in the most liquid stocks in a sample of the largest companies in the United States.
Abstract: The trading volume channeled through off-market crossing networks is growing. Passive matching of orders outside the primary market lowers several components of execution costs compared to regular trading. On the other hand, the risk of non-execution imposes opportunity costs, and the inherent “free riding” on the price discovery process raises concerns that this eventually will lead to lower liquidity in the primary market. Using a detailed data set from a large investor in the US equity markets, we find evidence that competition from crossing networks is concentrated in the most liquid stocks in a sample of the largest companies in the US. Simulations of alternative trading strategies indicate that the investor’s strategy of initially trying to cross all stocks was cost effective: in spite of their high liquidity, the crossed stocks would have been unlikely to achieve at lower execution costs in the open market.

82 citations


Cited by
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Book ChapterDOI
01 Jan 2012
TL;DR: In this paper, a simple equilibrium model with liquidity risk is proposed, where a security's required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return.
Abstract: This paper solves explicitly a simple equilibrium model with liquidity risk. In our liquidityadjusted capital asset pricing model, a security s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return and liquidity. In addition, a persistent negative shock to a security s liquidity results in low contemporaneous returns and high predicted future returns. The model provides a unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels and provide evidence of flight to liquidity. r 2005 Elsevier B.V. All rights reserved.

1,156 citations

DissertationDOI
01 Jan 2005
TL;DR: In this paper, the authors investigated the relationship between economic growth and financial development in developing countries over 1988-2001 and found that while banks performance has a negative impact on growth, stock markets positively promote growth.
Abstract: This thesis investigates the relationship between economic growth and financial development in developing countries over 1988-2001. Previous studies have generally used averaged data, for both developing and developed countries, and inappropriate estimation methods. In an attempt to reach some definitive conclusions, Generalised Method of Moments dynamic estimation is used with a newly collected panel of annual data to assess the relationship. The results show that while banks performance has a negative impact on growth, stock markets positively promote growth. To reach an overall conclusion about the impact of finance on growth and to solve the problems associated with the existence of multicollinearity among the different measures of financial development, principal components analysis is used to generate new, comprehensive measures of financial development. In assessing the link between the new measures and financial development and growth, the results support the existence of an overall positive relationship. The thesis also examines the behaviour of interest rates in developing and industrialised countries using individual and panel unit root tests. The results are sensitive to the choice of the test, country and time unit.

882 citations

Book
01 Jan 2002
TL;DR: In this paper, the authors discuss the structure of trade, the benefits of trade and the origins of liquidity and volatility in the world. But they focus on the role of suppliers.
Abstract: PART I: THE STRUCTURE OF TRADING PART II: THE BENEFITS OF TRADE PART III: SPECULATORS PART IV: LIQUIDITY SUPPLIERS PART V: ORIGINS OF LIQUIDITY AND VOLATILITY PART VI: EVALUATION AND PREDICTION PART VII: MARKET STRUCTURES

796 citations

Journal ArticleDOI
Q. Farooq Akram1
TL;DR: In this paper, the authors investigate whether a decline in real interest rates and the US dollar contributes to higher commodity prices, and whether commodity prices display overshooting behavior in response to changes in Real interest rates.

469 citations