The effect of liquidity on stock returns in the Brazilian stock market


  • Laise Ferraz Correia
  • Hudson Fernandes Amaral
  • Aureliano Angel Bressan


The purpose of this paper is to check whether liquidity plays an important role in asset pricing, i.e., it intends to investigate whether the security prices are also determined by their liquidity. Thus, it examines whether the stock returns are empirically related to the turnover ratio (number of stocks traded as a fraction of the number of stocks outstanding), which was the proxy for liquidity. The statistical test accounted for the effects of beta, size and book-to-market ratio, which are considered as significant in explaining the variation in stock returns. The methodological base consisted of a multiple regression of panel data of the stocks traded at the Bovespa between March 1995 and December 2004, employing the method of seemingly unrelated regressions (SUR). This paper provides evidence of a linear and positive relationship between stock returns and liquidity, measured by the turnover, the number of stocks traded (volume) and the number of trades (frequency). Although this result is not in line with the hypothesis of a liquidity premium, which was proposed by Amihud and Mendelson (1986), it is consistent with the study of Jun et al. (2003) in emerging markets, including Brazil.

Key words: liquidity, stock returns, CAPM, capital markets.

Author Biographies

Laise Ferraz Correia

Hudson Fernandes Amaral

Aureliano Angel Bressan