Does the Liquidity Effect Exist in the Brazilian Stock Market?

24 Pages Posted: 14 Feb 2013

Date Written: February 14, 2013

Abstract

The purpose of this article is to analyze whether the liquidity effect exists in the Brazilian stock market. In addition to analyzing the liquidity effect, this article evaluated the capacity of CAPM and the Fama-French three-factor model (1993) in explaining it. For such purpose, the companies with shares traded in Bovespa were analyzed, in the period from 1995 to 2008. According to the results obtained, it can be concluded that there is a liquidity premium in the Brazilian market, regardless of the proxy used. The monthly premium varied from 0.83% to 2.19%, not adjusted for risk, and from 1.77% to 2.78%, adjusted for risk pursuant to CAPM, and from 1.24% to 3.04%, adjusted for risk according to the three-factor model, respectively. It was also observed that the liquidity premium was not restricted to the month of January, and that there were no substantial modifications when different periods were used in the analysis. In view of such evidence, the hypothesis of this article, that there is a liquidity premium in the Brazilian market, cannot be rejected. Moreover, it was observed that both CAPM and the three-factor model fail to explain the liquidity effect. The results obtained in this study can instigate the establishment of corporate policies which alleviate the liquidity costs, i.e., which improve the liquidity of the securities negotiated, reducing, as a result, the capital cost. By doing so, a company can increase its market value, improving the liquidity of its securities and shares, since the lower the capital cost, the greater the value of the company.

Keywords: anomalies, liquidity effect, assets pricing

JEL Classification: G12

Suggested Citation

Machado, Marcio Andre Veras and de Medeiros, Otavio Ribeiro, Does the Liquidity Effect Exist in the Brazilian Stock Market? (February 14, 2013). Available at SSRN: https://ssrn.com/abstract=2217941 or http://dx.doi.org/10.2139/ssrn.2217941

Marcio Andre Veras Machado (Contact Author)

Federal University of Paraiba (UFPB) ( email )

Centre for Applied Social Sciences
Graduate School of Management
João Pessoa, Paraiba
Brazil

Otavio Ribeiro De Medeiros

University of Brasilia ( email )

Campus Universitario Darcy Ribeiro
Gleba A - Reitoria
Brasilia, DF 70910-900
Brazil

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