Instability of returns and liquidity during the Covid-19 pandemic: evidence from the brazilian stock market

Brito, Anderson Dias

doi:10.5902/1983465984713

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Original Article • Rev. Adm. UFSM 17 (2) • June 2024 • https://doi.org/10.5902/1983465984713 copy

Instability of returns and liquidity during the Covid-19 pandemic: evidence from the brazilian stock market

Instabilidade dos retornos e liquidez durante a pandemia de Covid-19: evidências do mercado de ações brasileiro

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

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.

Volatility; Risk; Finance; Stock market

Variable	Abbreviation	Calculation
Idiosyncratic Risk Premium	DEFAULT	Average return of cpompanies with Aaa rating – average return of companies with Baa rating (Moody´s)
Exchange Rate	EXCH	Variation in the exchange rate of the US Dollar on day t–t-1
Market Risk Premium	MKT	Market return – risk free rate (Special System of Settlement and Custody)
Investiment Horizon Premium	TERM	Average return of 10 years government bonds subtracted from average return of 3-month government bonds

VAR	PRÉ-COVID Pandemic					COVID Pandemic					Mann Whitney (p-value)
VAR	Min	Average	Median	Standard Deviation	Max	Min	Average	Median	Standard Deviation	Max	Mann Whitney (p-value)
VIBOV_t	0,0008	0,0019	0,0015	0,0082	0,0013	0,0008	0,0030	0,0024	0,0082	0,0021	0,0000
VICON_t	0,0009	0,0019	0,0016	0,0083	0,0011	0,0011	0,0031	0,0024	0,0083	0,0020	0,0000
VIFNC_t	0,0014	0,0024	0,0022	0,0084	0,0010	0,0014	0,0050	0,0037	0,0129	0,0035	0,0000
VINDX_t	0,0009	0,0018	0,0015	0,0062	0,0010	0,0010	0,0026	0,0021	0,0062	0,0014	0,0000
VUTIL_t	0,0007	0,0018	0,0015	0,0080	0,0011	0,0007	0,0032	0,0024	0,0085	0,0023	0,0000
LIBOV_t	0,0027	0,0036	0,0035	0,0077	0,0008	0,0031	0,0058	0,0057	0,0077	0,0010	0,0000
LCONS_t	0,0031	0,0043	0,0040	0,0100	0,0012	0,0035	0,0071	0,0070	0,0100	0,0018	0,0000
LFINAN_t	0,0019	0,0028	0,0026	0,0066	0,0008	0,0026	0,0048	0,0046	0,0068	0,0011	0,0000
LINDX_t	0,0029	0,0040	0,0038	0,0079	0,0010	0,0029	0,0060	0,0058	0,0079	0,0011	0,0000
LUTIL_t	0,0027	0,0036	0,0036	0,0066	0,0008	0,0027	0,0048	0,0046	0,0066	0,0010	0,0000
DEFAULT_t	-0,1908	-0,0098	-0,0126	0,2195	0,0888	-0,1908	0,0109	0,0139	0,0095	0,1190	0,5757
PRAZO_t	-0,0378	0,0006	0,0009	0,0525	0,0129	-0,0507	0,0005	0,0001	0,0525	0,0290	0,9763
DOLAR_t	-0,0234	0,0007	0,0006	0,0007	0,0296	-0,0330	0,0004	0,0009	0,0136	0,0366	0,0000
MKT_t	-0,0290	-0,0039	-0,0033	0,0212	0,0112	-0,0290	-0,0005	0,0002	0,0212	0,0148	0,0033
n = 292						n = 292

Varianle	Calculated Value	Critical Value - 1%	Critical Value - 5%
VIBOV_t	-4,9764	-3,43	-2,86
VICON_t	-4,7535	-3,43	-2,86
VIFNC_t	-4,1220	-3,43	-2,86
VINDX_t	-4,9635	-3,43	-2,86
VUTIL_t	-4,4910	-3,43	-2,86
LIBOV_t	-3,6800	-3,43	-2,86
LCONS_t	-3,9070	-3,43	-2,86
LFINAN_t	-3,4987	-3,43	-2,86
LINDX_t	-3,5677	-3,43	-2,86
LUTIL_t	-4,8804	-3,43	-2,86
DEFAULT_t	-7,9584	-3,43	-2,86
PRAZO_t	-18,8797	-3,43	-2,86
DOLAR_t	-11,2535	-3,43	-2,86
MKT_t	-9,7879	-3,43	-2,86

Regime 1			Regime 2
IBOV and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept_i	-0,9740***	0,6840	Intercept	-0,7915***	0,5890
LIQ_i,t	0,1353*	0,0021	LIQ_i,t	1,4704***	0,0228
DEFAULT_t	-0,0204	0,3646	DEFAULT_t	-0,3555	0,8649
EXCH_t	0,3558***	0,1230	EXCH_t	0,5433***	0,2230
MKT_t	0,3370*	0,1654	MKT_t	0,3397*	0,1658
TERM_t	-0,1967	1,2171	TERM_t	0,3891***	1,2171
Multiple R²	0,3273		Multiple R²	0,5372
Sigma	0,4489		Sigma	0,6220
Pli	0,9573	0,0426	P2ii	0,0275	0,9724
CONS and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-0,9586***	0,4510	Intercept	-2,3134	1,9870
LIQ_i,t	0,1313**	0,0624	LIQ_i,t	1,3331***	0,2323
DEFAULT_t	-0,0750	0,1073	DEFAULT_t	-0,8931**	0,4299
EXCH_t	0,3449***	0,0325	EXCH_t	0,3668*	0,1890
MKT_t	0,4072***	0,1529	MKT_t	0,39155**	0,6685
TERM_t	0,0888	0,4628	TERM_t	2,1580	1,4688
Multiple R²	0,4935		Multiple R²	0,6843
Sigma	0,2986		Sigma	0,5689
Pli	0,9902	0,0237	P2ii	0,0097	0,9902
FINAN and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-0,9860***	0,4514	Intercept	-0,8533***	0,6114
LIQ_i,t	0,2709***	0,0596	LIQ_i,t	4,3671 ***	1,20809
DEFAULT_t	0,1166	0,1417	DEFAULT_t	-0,6212**	0,2342
EXCH_t	0,3092***	0,0312	EXCH_t	0,6800***	0,0447
MKT_t	0,3020***	0,2699	MKT_t	0,3546*	0,1430
TERM_t	0,0200	0,5124	TERM_t	2,1580	0,9634
Multiple R²	0,5313		Multiple R²	0,8358
Sigma	0,2856		Sigma	0,2614
Pli	0,9854	0,0291	P2ii	0,0145	0,9708
Regime 1			Regime 2
INDX and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-0,8699***	0,5509	Intercept	-0,4688*	2,3257
LIQ_i,t	0,1859**	0,0791	LIQ_i,t	2,2035***	0,2898
DEFAULT_t	-0,0502	0,1121	DEFAULT_t	-0,9727**	0,4665
EXCH_t	0,2110***	0,0352	EXCH_t	0,0895	0,1963
MKT_t	0,9907	1,2324	MKT_t	1,1679*	0,6575
TERM_t	0,0752	0,4545	TERM_t	2,4557	1,5755
Multiple R²	0,2753		Multiple R²	0,7161
Sigma	0,3319		Sigma	0,4948
Pli	0,9799	0,0970	P2ii	0,0200	0,9029
UTIL and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-0,6861***	0,5255	Intercept	-0,6244***	2,1812
LIQ_i,t	0,3832	0,0783	LIQ_i,t	1,1014 ***	0,3366
DEFAULT_t	0,1881	0,1261	DEFAULT_t	-0,8472*	0,6838
EXCH_t	0,1012***	0,0307	EXCH_t	0,6739***	0,1405
MKT_t	0,3305**	1,4050	MKT_t	2,1314**	2,3398
TERM_t	-0,2049	0,5719	TERM_t	1,8631	1,7611
Multiple R²	0,1878		Multiple R²	0,7055
Sigma	0,3636		Sigma	0,6130
Pli	0,9860	0,0505	P2ii	0,0139	0,9494

Regime 1			Regime 2
IBOV and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-0,7818***	0,6764	Intercept	-0,5827	0,8837
LIQ_i,t	0,2512**	0,0945	LIQ_i,t	1,2143 ***	0,1201
DEFAULT_t	0,1915	0,1718	DEFAULT_t	-0,2853	0,2296
EXCH_t	0,0383	0,0409	EXCH_t	0,1314*	0,0551
MKT_t	0,3794**	0,1582	MKT_t	0,5214 **	0,1647
TERM_t	-0,8485	0,8222	TERM_t	0,2201*	0,9784
Multiple R²	0,3371		Multiple R²	0,5071
Sigma	0,2956		Sigma	0,3474
Pli	0,9663	0,0400	P2ii	0,0336	0,9599
CONS and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-0,8914***	0,4059	Intercept	-3,0921***	0,7547
LIQ_i,t	0,2233***	0,0615	LIQ_i,t	1,0348***	0,1030
DEFAULT_t	-0,0102	0,1120	DEFAULT_t	-0,2413	0,2244
EXCH_t	0,2871***	0,0272	EXCH_t	0,0922	0,0590
MKT_t	0,4572**	0,1178	MKT_t	0,4336*	0,6203
TERM_t	-0,0727	0,9070	TERM_t	0,2886	0,9733
Multiple R²	0,5242		Multiple R²	0,6801
Sigma	0,2532		Sigma	0,3074
Pli	0,9771	0,040	P2ii	0,0228	0,9590
Regime 1			Regime 2
FINAN and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-0,8154***	0,4661	Intercept	-1,8881***	0,6092
LIQ_i,t	0,2873***	0,0624	LIQ_i,t	5,4266***	1,1825
DEFAULT_t	0,1252	0,1423	DEFAULT_t	-0,5841*	0,2325
EXCH_t	0,2972***	0,0329	EXCH_t	0,6630***	0,0444
MKT_t	0,2937*	1,2663	MKT_t	1,3069*	1,4078
TERM_t	-0,0172	0,3310	TERM_t	0,2074	0,9641
Multiple R²	0,5369		Multiple R²	0,8407
Sigma	0,2849		Sigma	0,2576
Pli	0,9849	0,0295	P2ii	0,0150	0,9704
INDX and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-0,7973***	0,4389	Intercept	-0,2870***	0,3587
LIQ_i,t	0,3336***	0,0677	LIQ_i,t	1,0079 ***	0,0679
DEFAULT_t	-0,0382	0,1283	DEFAULT_t	-0,2336	0,2103
EXCH_t	0,1870***	0,0253	EXCH_t	0,0003*	0,0062
MKT_t	1,9552	1,1639	MKT_t	1,6687*	0,4463
TERM_t	-0,1431*	0,6434	TERM_t	1,1133	0,8653
Multiple R²	0,2252		Multiple R²	0,5543
Sigma	0,4722		Sigma	0,2849
Pli	0,9361	0,0817	P2ii	0,0638	0,9182
UTIL and Liquidity
	Coefficient	Standard Error		Coefficient	Standard Error
Intercept	-1,6696***	0,6756	Intercept	-0,828***	0,7686
LIQ_i,t	-0,0347	0,1055	LIQ_i,t	0,9383***	0,1090
DEFAULT_t	-0,0095	0,2106	DEFAULT_t	-0,4915*	0,2150
EXCH_t	0,3279**	0,0328	EXCH_t	0,2662***	0,0431
MKT_t	0,5542*	1,7817	MKT_t	0,8693***	1,6414
TERM_t	-0,0698	1,1617	TERM_t	2,1085*	0,9910
Multiple R²	0,3918		Multiple R²	0,5329
Sigma	0,3140		Sigma	0,3581
Pli	0,9736	0,0286	P2ii	0,0263	0,9713

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[1] Conflict of Interest: The authors have stated that there is no conflict of interest.