Ricerc@Sapienza

We focus on the relationship between liquidity and market efficiency, and investigate the behavior of three stock market indexes (S&P500, Nasdaq and DAX) before, during and after the global financial crisis. We find that, once accounted for the scale, the two attributes are strongly related and empirical evidence is provided that, when market efficiency is measured through the pointwise regularity of the price, it is a better forecaster of illiquidity than vice versa. We also find that the variation of the illiquidity premium declined to zero during the unconventional interventions that the Federal Reserve launched to face the credit crunch.