Chung TF* and Ariff M
The Global Financial Crisis has its origins in the surge in banking liquidity, which contributes to the volatility and instability of financial markets by affecting prices of financial instruments. This paper investigates the impact of banking liquidity, money supply and stock prices in ASEAN-3 economies. Although banking liquidity is widely attributed as one of the causes of financial instability, it is not fully verified or investigated despite earlier research attempts. The transmission channel of banking liquidity to banking credit is through net present value projects of firms. With higher net present value, this will support earnings and consequently share prices of firms will respond positively. This is the thesis statement of our paper and according to a major study, 52% of share returns emanate from macro-economic variables. To control for cross-section dependence and heterogeneity, this study use a panel data of 3 similar countries with 3 equations to study the relationship between money supply, liquidity and share prices over the period 2001:4 to 2012:2. Our findings show that banking liquidity is positively related to money supply with a positive impact on share prices.
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