This study examines the impact of stock market liquidity, which proxies for the implicit cost of trading shares with the real GDP growth in the European market using modern econometrics techniques. We provide evidence that stock market liquidity contains strong and vigorous information about the condition of the economy for both the UK and Italy in the presence of well-established leading indicators. Our findings show that stock market liquidity improves real GDP activity in the case of Italy, while the liquidity of the stock market slow down the Real GDP activity in the UK market and there is a reverse relationship between stock market liquidity and the real GDP growth rate in the short-terms. The empirical findings show that there is a differential role of liquidity in explaining the course of macroeconomic condition between a capital-based market and Mediterranean-European(i.e. Less-developed) economies.
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