Pricing of Liquidity Risk: New Evidence from the Latin American Emerging Stock Markets

Gabriel Augusto de Carvalho, Hudson Fernandes Amaral, Juliano Lima Pinheiro and Laíse Ferraz Correia

Emerging Markets Finance and Trade, 2022, vol. 58, issue 2, 398-416

Abstract: This paper aims to analyze whether the liquidity risk is priced in Latin-American emerging stock markets. For that, we test the performance of the liquidity augmented version of Fama-French three and five factor models and Carhart four factor model since there is not yet a consensus about their suitability for these markets. Two versions of a liquidity factor were constructed based on two proxies that consider different dimensions of liquidity and are more appropriate for low frequency data. The GRS statistics showed Latin American average returns are better explained by the liquidity augmented Fama-French five-factor model. When estimated by GMM-IVd, due to the possible endogenous problems caused by liquidity, the results of the models did not significantly change. The results were robust to the January Effect. Furthermore, when the sample period was divided into two subperiods, both were statistically significant, although the explanatory power was greater in the second subperiod.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:58:y:2022:i:2:p:398-416

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DOI: 10.1080/1540496X.2021.1991184

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