Liquidity connectedness and output synchronisation

The paper examines the transmission of liquidity shocks across a panel of countries and explores the power of liquidity spillovers in generating output synchronisation. Using the information on stocks, we generate aggregate stock liquidity indices in 24 countries. From the error variance decomposition, we find that countries transmit liquidity shocks across each other, and the European countries have higher cross-variance shares. We find that the transmission of liquidity shocks across economies yields a divergence in output. A standard deviation increase in liquidity connectedness lowers the co-movement in output. Thus, liquidity transfers have economic implications.