This study examines whether stock market illiquidity forecasts real UK GDP growth using
data over the period 1989q1-2012q2. Apart from standard linear model specifications, we
also utilize non-linear models, which allow for regime switching behavior in terms of a liquid
versus an illiquid market regime and over the phases of the business cycle. Our findings
support a statistically significant negative relationship between stock market illiquidity and
future UK GDP growth over and above the usual control variables. This relationship is found …