The effect of foreign investment flow on commonality in liquidity on the Brazilian stock market

Silva, Claudio Pilar; Machado, Márcio André Veras

doi:10.1590/1808-057x201909530

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Revista Contabilidade & Finanças

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Original Article • Rev. contab. finanç. 31 (84) • Sep-Dec 2020 • https://doi.org/10.1590/1808-057x201909530 copy

The effect of foreign investment flow on commonality in liquidity on the Brazilian stock market^* * Article presented at the XLI ANPAD Meeting, São Paulo, SP, Brazil, October 2017

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

The aim of this study was to analyze the characteristics and determinants of commonality in liquidity in the Brazilian stock market. Since the internationalization of the Brazilian stock market (Bolsa, Brasil, Balcão - B3), the flow of foreign investment in Brazil has increased over the years, except in times of crisis. Thus, the present study argues that, in the Brazilian stock market, commonality in liquidity is partly determined by foreign investor trading. Despite the benefits obtained from foreign resources in the Brazilian stock market, it is important to analyze the effect of this flow of foreign investment into the Brazilian stock market. This paper contributes to the current literature by providing evidence for commonality in liquidity in the Brazilian stock market and by showing its stronger effect in periods of market decline. Therefore, investors pay greater attention to the risk of commonality in their portfolios when executing orders and to their trading timing due to the increase in transaction costs of the stocks most sensitive to commonality in liquidity. The study sample consisted of a set of companies listed on the Brazilian stock exchange from January 2007 through December 2017. To analyze commonality in liquidity, we used the model proposed by Karolyi, Lee, and Djik (2012) and by Qian, Tam, and Zhang (2014). To measure the influence of foreign investors on the Brazilian stock market, we used three measures based on Gonçalves and Eid (2016). The results showed that commonality occurs in the Brazilian stock market and that it peaks during international financial crises, as well as indicated that commonality might be higher in times of crisis due to capital constraint. In addition, the results showed that foreign investor participation partly determined commonality.

Keywords:
commonality; liquidity; foreign investor

	*R_i*	*L_i*	*R_m*	*L_m*
R_i	$σ_{R_{i}}^{2}$	$c o v (R_{i}, L_{i})$	$c o v (R_{i}, R_{m})$	$c o v (R_{i}, L_{m})$
L_i		$σ_{L_{i}}^{2}$	$c o v (L_{i}, R_{m})$	$c o v (L_{i}, L_{m})$
R_m			$σ_{R_{m}}^{2}$	$c o v (R_{m}, L_{m})$
L_m				$σ_{L_{m}}^{2}$

Year/type of investor	Individual (%)	Institutional (%)	Foreign investors (%)	Public and private companies (%)	Financial institutions (%)	Others
2000	20.2	15.8	22.0	4.2	36.7	1.1
2001	21.7	16.0	25.1	3.0	34.0	0.2
2002	21.9	16.5	26.0	3.3	32.1	0.2
2003	26.2	27.6	24.1	3.7	18.0	0.4
2004	27.5	28.1	27.3	3.0	13.8	0.4
2005	25.4	27.5	32.8	2.3	11.7	0.3
2006	24.6	27.2	35.5	2.2	10.4	0.1
2007	23.0	29.8	34.5	2.2	10.4	0.2
2008	26.8	27.1	35.3	2.8	7.8	0.1
2009	30.5	25.7	34.2	2.2	7.4	0.1
2010	26.4	33.3	29.6	2.3	8.4	0.1
2011	21.7	33.5	34.8	1.3	8.6	0.1
2012	17.9	32.1	40.4	1.5	8.1	0.0
2013	15.2	32.8	43.7	1.0	7.4	0.0
2014	13.7	29.0	51.2	1.0	5.1	0.1
2015	13.7	27.2	52.8	1.2	5.1	0.0
2016	16.8	24.8	52.1	1.0	5.2	0.0
2017	16.9	27.3	49.2	1.3	5.3	0.0

Year	Population (n)	Sample (n)	Population (%)
2007	404	73	18
2008	393	99	25
2009	385	104	27
2010	381	134	35
2011	373	135	36
2012	364	148	41
2013	363	155	43
2014	363	169	46
2015	359	158	44
2016	349	147	42
2017	344	170	49
Mean	376	140	37

Year	Stocks (n)	Mean	Minimum	Maximum	Standard deviation
2007	73	0.245	0.000	0.975	0.184
2008	99	0.222	0.002	0.967	0.171
2009	104	0.203	0.004	0.963	0.160
2010	134	0.222	0.002	0.932	0.162
2011	135	0.226	0.001	0.940	0.159
2012	148	0.233	0.001	0.890	0.172
2013	155	0.238	0.001	0.927	0.158
2014	169	0.268	0.001	0.945	0.191
2015	158	0.258	0.001	0.899	0.178
2016	147	0.259	0.001	0.927	0.183
2017	170	0.256	0.000	0.960	0.179
Overall Mean	135	0.239	0.001	0.939	0.172

Year	Commonality
Year	1^st quartile	2^nd quartile	3^rd quartile
2007	0.186	0.195	0.345
2008	0.179	0.187	0.290
2009	0.193	0.198	0.326
2010	0.177	0.187	0.287
2011	0.177	0.188	0.301
2012	0.189	0.192	0.304
2013	0.191	0.197	0.306
2014	0.184	0.202	0.333
2015	0.188	0.205	0.367
2016	0.197	0.209	0.369
2017	0.207	0.204	0.360

	Coefficient	Standard error	t statistic	p-value
Constant	-0.009**	0.039	-2.358	0.020
COM_Liq_t-1	-0.593***	0.067	-8.818	0.000
Ribov	-0.746*	0.399	-1.869	0.064
Vol	6.191**	2.155	2.873	0.048
Liq	-0.256	0.200	-1.283	0.202

	Coefficient	Standard error	t statistic	p-value
Constant	-0.097**	0.039	-2.490	0.014
Com_Liq_t-1	-0.592***	0.068	-8.721	0.000
Ribov	-0.668	0.411	-1.626	0.106
Vol	6.208***	2.152	2.885	0.005
Liq	-0.250	0.200	-1.251	0.213
R_negative	0.011	0.012	0.864	0.389

	Coefficient	Standard error	t statistics	p-value
Constant	-0.075*	0.038	-1.930	0.056
Com_Liq_t-1	-0.556***	0.073	-7.567	0.000
Ribov	-1.508***	0.453	-3.326	0.001
Vol	6.903**	2.214	3.117	0.023
Liq	-0.114	0.198	-0.578	0.564
R_extnegative	-0.280***	0.095	-2.947	0.004

	Model 1	Model 2	Model 3
Constant	-0.079**	-0.070*	-0.081**
Com_Liq_t-1	-0.588***	-0.580***	-0.584***
Ribov	-1.303***	-1.512***	-0.962**
Vol	5.552***	4.987**	5.613**
Liq	0.182	0.224	-0.210
Inv	-1.642***	1.627***	1.647

	Investor
	Model 1	Model 2	Model 3
Constant	-0.029	-0.032	-0.035
Com_Liq_t-1	-0.583***	-0.575***	-0.562***
Ribov	-1.221***	-1.386***	-0.626
Vol	1.839	2.176	2.217
Liq	0.240	0.234	-0.175
EMBI_t-1	0.568**	0.444*	0.614**
SELIC_t-1	0.121	0.119	0.475
IPCA_t-1	0.009	0.007	0.006
Inv	-1.591***	1.468***	-0.592
Adjusted R²	0.459	0.454	0.413

	Investor
	Model 1	Model 2	Model 3
Constant	-0.068	-0.057	-0.065
Com_Liq_t-1	-0.589***	-0.580***	-0.586***
Ribov	-1.282***	-1.490***	-0.949*
Vol	6.220***	5.662**	6.397**
Liq	0.180	0.221	-0.204
Crisis	-0.064	-0.063	-0.074
Invest Grade	0.019	0.016	0.019
Inv	-1.612***	1.599***	1.625
Adjusted R²	0.442	0.446	0.390

Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária Av. Prof. Luciano Gualberto, 908 - prédio 3 - sala 118, 05508 - 010 São Paulo - SP - Brasil, Tel.: (55 11) 2648-6320, Tel.: (55 11) 2648-6321, Fax: (55 11) 3813-0120 - São Paulo - SP - Brazil
E-mail: recont@usp.br

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The effect of foreign investment flow on commonality in liquidity on the Brazilian stock market* * Article presented at the XLI ANPAD Meeting, São Paulo, SP, Brazil, October 2017

ABSTRACT

The effect of foreign investment flow on commonality in liquidity on the Brazilian stock market^* * Article presented at the XLI ANPAD Meeting, São Paulo, SP, Brazil, October 2017