Effects of Monetary Policy on Stock Market Liquidity : Empirical Analysis on the Swedish Market

Abstract: After the 2008-2009 crisis, many studies have been done to assess the stock market liquidity and what influences this. The monetary policy of a central bank can have a broad impact of a country's economy and is believed to also affect the stock market. In addition, the goal of the central bank differs for every country which may affect the transmission effects seen in previous studies. This study takes a closer look at how monetary policy affect stock market liquidity fora small open economy, Sweden. The method of use includes vector autoregression, Granger tests and impulse response functions. The results show that we cannot distinguish a clear effect on stock market liquidity. However, findings show that there is a disturbance in stock market liquidity after a change in monetary policy. Granger tests also suggest an interesting dual causality. These results are consistent when testing both with monthly and daily data.