Instability of returns and liquidity during the Covid-19 pandemic: evidence from the brazilian stock market
DOI:
https://doi.org/10.5902/1983465984713Keywords:
Volatility, Risk, Finance, Stock marketAbstract
Purpose: This study aimed to analyze the impact of liquidity on the volatility of the Brazilian stock market, considering the effects resulting from the COVID-19 pandemic.
Design/methodology/approach: The sample for this research consisted of the IBOVESPA and the sectoral indices of B3. The analysis covers the period from January 2, 2019, to July 11, 2021. The estimations were performed using the two-regime Markov switching method.
Findings: The results show that liquidity has an asymmetric impact on return volatility, both for the IBOVESPA and the sectoral indices. This relationship is more pronounced during the pandemic period than before the crisis. Therefore, this research sought to contribute to the discussion on how the liquidity of the market would impact the returns in a crisis period. This also dialogues with and contributes to the literature in emergent countries on market liquidity and systematic risk.
Research limitations/implications: The results of this study do not allow for generalizations, as the data used considers a short time series from a single emerging country.
Originality/value: This study provides practical contributions to investors with additional information regarding market liquidity and systemic risk, as it can demonstrate better investment opportunities. There are also contributions to the literature from a behavioral perspective on liquidity and market volatility in an emerging country. Furthermore, the findings provide arguments about market efficiency as well as confirming the asset pricing theory.
Downloads
References
Acharya, V. V., Amihud, Y., & Bharath, S. T. (2013). Liquidity risk of corporate bond returns: Conditional approach. Journal of Financial Economics, 110(2), 358–386. https://doi.org/10.1016/j.jfineco.2013.08.002
Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 17(2), 223–249. https://doi.org/10.1016/0304-405X(86)90065-6
Au Yong, H. H., & Laing, E. (2021). Stock market reaction to COVID-19: Evidence from U.S. Firms’ International exposure. International Review of Financial Analysis, 76, 101656. https://doi.org/10.1016/j.irfa.2020.101656
Avelar, E. A., Ferreira, P. O., & Ferreira, C. D. (2020). Análise dos Efeitos e das Medidas Adotadas pelas Companhias Abertas Brasileiras Frente à Pandemia. In XX Usp International Conference In Accounting, São Paulo, SP. Disponível em: https://congressousp.fipecafi.org/anais/20UspInternational/ArtigosDownload/2861.pdf
Baig, A. S., Butt, H. A., Haroon, O., & Rizvi, S. A. R. (2021). Deaths, panic, lockdowns and US equity markets: The case of COVID-19 pandemic. Finance Research Letters, 38, 101701. https://doi.org/10.1016/j.frl.2020.101701
Baker, M., & Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Stock Returns. The Journal of Finance, 61(4), 1645–1680. https://doi.org/10.1111/j.1540- 6261.2006.00885.x
Będowska-Sójka, B. (2021). Is liquidity wasted? The zero-returns on the Warsaw Stock Exchange. Annals of Operations Research, 297(1–2), 37–51.https://doi.org/10.1007/s10479-020-03849-5
Będowska-Sójka, B., & Echaust, K. (2020). What is the best proxy for liquidity in the presence of extreme illiquidity? Emerging Markets Review, 43, 100695. https://doi.org/10.1016/j.ememar.2020.100695
Bilel, H & Mondher, K. (2021). What can explain catering of dividend? Environment information and investor sentiment. Journal of Economics and Finance, 45, https://doi.org/10.1007/s12197-021-09540-0
Bloomfield, R., O’Hara, M., & Saar, G. (2005). The “make or take”; decision in an electronic market: Evidence on the evolution of liquidity. Journal of Financial Economics, 75(1), 165–199. https://doi.org/10.1016/j.jfineco.2004.07.001
Brasil, M. da S. (2020). Primeiro caso de COVID-19 no Brasil permanece sendo o de 26 de fevereiro. https://www.gov.br/saude/pt-br/assuntos/noticias/primeiro-caso-de-COVID-19- no-brasil-permanece-sendo-o-de-26-de-fevereiro
Butt, H. A., Högholm, K., & Sadaqat, M. (2021). Reversal returns and expected returns from liquidity provision: Evidence from emerging markets. Journal of Multinational Financial Management, 59. https://doi.org/10.1016/j.mulfin.2020.100664
Caldas, A. V. S., Silva, E. de S., Silva Júnior, A. F. de A., & Cruz, U. de B. (2021). The effects of Covid - 19 on the performance of the shares of B3 ́s sectors. Contextus – Revista Contemporânea de Economia e gestão, 19, 15-28. https://doi.org/10.19094/contextus.2021.60146
Chebbi, K., Ammer, M. A., & Hameed, A. (2021). The COVID-19 pandemic and stock liquidity: Evidence from S&P 500. The Quarterly Review of Economics and Finance, 81, 134–142. https://doi.org/10.1016/j.qref.2021.05.008
Chung, K. H., & Chuwonganant, C. (2014). Uncertainty, market structure, and liquidity. Journal of Financial Economics,113(3), 476–499. https://doi.org/10.1016/j.jfineco.2014.05.008
Damodaran, A. (2012) Investment valuation: tools and techniques for determining the value of any assets. 3. ed. New Jersey: Wiley & Sons
El-Chaarani, H. (2023). The Impact of COVID-19 on the Performance of Islamic Banks in the MENA Region. ISRA International Journal of Islamic Finance, 15(2). https://doi.org/10.55188/ijif.v15i1.488
Engle, R. F. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica, 50(4), 987. https://doi.org/10.2307/1912773
Foran, J. Hutchinson, M. C., & O’Sullivan, N. (2015). Liquidity Commonality and Pricing in UK Equities. Forthcoming, Research in International Business and Finance. http://dx.doi.org/10.2139/ssrn.2559308
Hamilton, J. D. (1989). A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57(2), 357. https://doi.org/10.2307/1912559
Harjoto, M. A., Rossi, F., Lee, R., & Sergi, B. S. (2021). How do equity markets react to COVID-19? Evidence from emerging and developed countries. Journal of Economics and Business, 115, 105966. https://doi.org/10.1016/j.jeconbus.2020.105966
Henriques, C., & Neves, E. (2021). Exploring the trade-off between liquidity, risk and return under sectoral diversification across distinct economic settings. Journal of Risk Finance, 22(2), 130–152. https://doi.org/10.1108/JRF-05-2020-0101
Hong, H., Bian, Z., & Lee, C.-C. (2021). COVID-19 and instability of stock market performance: evidence from the U.S. Financial Innovation, 7(1), 12. https://doi.org/10.1186/s40854-021-00229-1
Just, M., & Echaust, K. (2020). Stock market returns, volatility, correlation and liquidity during the COVID-19 crisis: Evidence from the Markov switching approach. Finance Research Letters, 37, 101775. https://doi.org/10.1016/j.frl.2020.101775
Kocaarslan, B. (2023). Funding liquidity risk and the volatility of U.S. municipal green bonds during the COVID-19 pandemic. Finance Research Letters, 58, 104560. https://doi.org/10.1016/j.frl.2023.104560
Leirvik, T., Fiskerstrand, S. R., & Fjellvikås, A. B. (2017). Market liquidity and stock returns in the Norwegian stock market. Finance Research Letters, 21, 272–276. https://doi.org/10.1016/j.frl.2016.12.033
Lesmond, D. A., Ogden, J. P., & Trzcinka, C. A. (1999). A new estimate of transaction costs.
Review of Financial Studies, 12(5), 1113–1141. https://doi.org/10.1093/rfs/12.5.1113
Liu,W. (2006). A liquidity-augmented capital asset pricing model. Journal of Financial Economics, 82(3), 631–671. https://doi.org/10.1016/j.jfineco.2005.10.001
Machado, M. A. V., & Medeiros, O. R. (2012). Does the liquidity effect exist in the brazilian stock market?. Brazilian Business Review, 9(4), 28-51.https://doi.org/10.15728/bbr.2012.9.4.2
Malagon, J., Moreno, D., & Rodríguez, R. (2018). Idiosyncratic volatility, conditional liquidity and stock returns. International Review of Economics and Finance, 53(October 2017), 118–132. https://doi.org/10.1016/j.iref.2017.10.011
Pechynakis, K., Fragkos, G., Zounis, D., Belegris, A., Veloukas, Z., & Charalampaki, E. (2022). Openness, Resilience and Vulnerabilities in an Uncertain World. Irish Studies in International Affairs 33(1). https://doi.org/10.1353/isia.2022.0026.
Perobelli, F. F. C., Famá, R., & Sacramento, L. C. (2016). Return and liquidity relationships on market and accounting levels in Brazil. Revista Contabilidade e Financas, 27(71), 259– 272. https://doi.org/10.1590/1808-057x201601530
Phan, D. H. B., & Narayan, P. K. (2020). Country Responses and the Reaction of the Stock Market to COVID-19—a Preliminary Exposition. Emerging Markets Finance and Trade, 56(10), 2138–2150. https://doi.org/10.1080/1540496X.2020.1784719
Rahman, M. L., Amin, A., & Al Mamun, M. A. (2021). The COVID-19 outbreak and stock market reactions: Evidence from Australia. Finance Research Letters, 38, 101832. https://doi.org/10.1016/j.frl.2020.101832
Ruenzi, S., Ungeheuer, M., & Weigert, F. (2020). Joint Extreme events in equity returns and liquidity and their cross-sectional pricing implications. Journal of Banking & Finance, 115, 105809. https://doi.org/10.1016/j.jbankfin.2020.105809
Silva Júnior, C. O., Machado, M. A. V. (2020). Is commonality in liquidity a priced risk factor? RAM, Rev. Adm. Mackenzie, 21 (2). https://doi.org/10.1590/1678-6971/eRAMF200158
Yaseen, H., & Omet, G. (2021). The Jordanian capital market: Liquidity cost during COVID19 pandemic infection. Accounting, 1025–1032. https://doi.org/10.5267/j.ac.2021.3.006
Yong, H. H. A., Laing, E. (2021) Stock market reaction to COVID-19: Evidence from U.S. Firms’ International exposure. International Review of Financial Analysis, 76, 101656. https://doi.org/10.1016/j.irfa.2020.101656
Zaremba, A., Aharon, D. Y., Demir, E., Kizys, R., & Zawadka, D. (2021). COVID-19, government policy responses, and stock market liquidity around the world: A note. Research in International Business and Finance, 56, 101359. https://doi.org/10.1016/j.ribaf.2020.101359
Zhang, Q., Choudhry, T., Kuo, J.M., & Liu, X. (2021). Does liquidity drive stock market returns? The role of investor risk aversion. Review of Quantitative Finance and Accounting. https://doi.org/10.1007/s11156-021-00966-5
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Revista de Administração da UFSM
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors of articles published by ReA/UFSM retain the copyright of their works, licensing them under the Creative Commons (CC-BY 4.0), which allows articles to be reused and distributed without restriction, provided that the original work is properly cited.
