Liquidity spirals, commonality, corporate governance and crisis : a case of an emerging market.

Summary In this paper, we attempt to bridge the gap between two strands of the literature. First, we conduct an in-depth investigation of the relationship between liquidity and market decline in an emerging country (Brazil). In our research, we follow the methodology used by Hameed et al (2010) and Adrian et al (2011). In the first part of the study, using the liquidity measure estimation variable proposed by Corwin and Schultz (2012), we perform a time series analysis to estimate the effect of market returns on individual returns, and the impact of the crisis on liquidity. We further extend our analysis to funding liquidity, as measured by the spread of the remuneration between commercial papers and the central bank's base rate, to estimate the effect of the market decline when speculators face a funding constraint. In the second part of our research, we focus on liquidity factors. We estimate the effect of market liquidity on idiosyncratic liquidity, and examine whether this effect is amplified in the context of a significant market decline. In the third part of the thesis, we divide stocks into three equally weighted portfolios based on differential corporate governance practices. We perform the analysis mentioned above to estimate whether the liquidity of firms with different corporate governance practices react differently in the presence of significant market declines and liquidity spirals.