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Disentangling the relationship between liquidity and returns in Latin America

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  • French, Joseph J.
  • Taborda, Rodrigo

Abstract

We dissect the impact of liquidity on returns of firms in Brazil, Chile, Colombia, Mexico, and Peru, 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, and that global illiquidity and endogenously determined crisis periods are negatively associated with returns. In contrast to the majority of the literature on developed markets, our results indicate that liquidity is a less important risk factor in Latin America. Our findings suggest that improvements in firm-level liquidity will enhance returns and reduce the vulnerability of returns to global illiquidity.

Suggested Citation

  • French, Joseph J. & Taborda, Rodrigo, 2018. "Disentangling the relationship between liquidity and returns in Latin America," Global Finance Journal, Elsevier, vol. 36(C), pages 23-40.
    • Handle: RePEc:eee:glofin:v:36:y:2018:i:c:p:23-40
    DOI: 10.1016/j.gfj.2017.10.006
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    2. Arango, Ignacio & Agudelo, Diego A., 2019. "How does information disclosure affect liquidity? Evidence from an emerging market," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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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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