Does Liquidity Matter When Crisis Is Brewing? Equity Returns and Intraday Liquidity in DAX Futures Market

Abstract

Inspired by Mishkin (2011), we study a sample of high-frequency Eurex trading data from the peak of economic expansion preceding the global financial crisis of 2007-2009. Trading volume measures and bidask spread in DAX futures market explain DAX equity returns. Advanced variable selection and multinomial model with survey analysis identify most important explanatory variables under specific market conditions. The index futures trading volume, along with bid-ask spread, identify extreme values of the underlying equity index returns. Further, the Markov Chain Monte Carlo (MCMC) model uncovers change points in the non-monotonic relationship between futures liquidity and the equity index returns, and identifies conditions leading to expected negative returns.