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Disentangling the relationship between liquidity and returns in Latin America

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  • Joseph J. French
  • Rodrigo Taborda

Abstract

We dissect the impact of liquidity on returns of Latin American firms using a detailed data set of firm characteristics over various market cycles. We find that firm-level liquidity (illiquidity) is positively (negatively) associated with returns. Further analysis reveals that global illiquidity and endogenously determined crisis periods are negatively associated with returns. Our results are in contrast to the majority of the literature on developed markets and indicate that liquidity is less of an important risk factor in Latin America. Our results suggest that improvements in firm-level liquidity will enhance returns and reduce the vulnerability of returns to global illiquidity.

Suggested Citation

  • Joseph J. French & Rodrigo Taborda, 2017. "Disentangling the relationship between liquidity and returns in Latin America," Documentos CEDE 15606, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:015606
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    More about this item

    Keywords

    Liquidity; Illiquidity; Latin America; VIX; Financial Crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • F30 - International Economics - - International Finance - - - General

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