An Empirical Analysis of the Russian Financial Markets’ Liquidity and Returns

Abstract

The study aims to identify whether illiquidity and returns in the Russian stock and bond markets may be forecasted with the help of local macroeconomic variables, internet queries, global factors as well as the fundamental asset classes’ characteristics. To address these questions we use the correlation analysis, the VAR analysis and Granger causality tests. Despite the structural instability of the Russian financial markets, the market microstructure variables influence each other and are affected by the characteristics of other asset types. In highly volatile markets dynamic models should be applied. Stock and bond returns may be used for forecasting liquidity and volatility in the Russian market. Stock illiquidity is not useful for forecasting returns in the Russian market as opposed to the US and UK markets. In the Russian market investors rely on risk factors rather than on illiquidity measures in decision-making process. Bond maturity in the Russian market has a significant impact on the bonds’ characteristics and implicitly on switching between different asset classes similarly to the US market. Increase in the number of internet queries may serve as an indicator of higher volatility and illiquidity in the Russian stock market in the future, but Google Trends should be used only in combination with other forecasting tools such as macroeconomic measures and political situation analysis.