Stock Market Liquidity in Chile
IMF Working Papers, November 16, 2016
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Bibliographic details
- Authors: Luis Brandao Marques
- Published: November 16, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475554656.001
Key findings
- Chile has a large but relatively illiquid stock market.
- Global factors such as global risk appetite and monetary policy in advanced economies are key cyclical determinants of liquidity in Chilean equities.
- Evidence from a cross-section of emerging markets suggests strong protection of minority shareholders can help improve stock market liquidity.
- Currently, illiquid in Chilean may have to pay 3½ percent more as cost of equity.
Determinants of liquidity
- Cyclical determinants:
- Global risk appetite.
- Monetary policy in advanced economies.
- Structural determinants:
- Investor protection and corporate governance arrangements (noted as important based on cross-country evidence).
Cross-country evidence and implications
- Cross-section evidence from emerging markets indicates that stronger protection of minority shareholders is associated with improved stock market liquidity.
- The analysis links governance features (investor protection) to liquidity outcomes, implying that regulatory and legal frameworks matter for market functioning.
Cost of equity and liquidity premium
- Illiquidity is associated with a higher cost of equity; the paper indicates a premium of 3½ percent for illiquid Chilean equities.
Policy recommendations
- Improve corporate governance in Chilean listed firms.
- Specifically recommend the adoption of a stewardship code to strengthen governance and investor protection, with the aim of improving market liquidity and reducing the liquidity-related cost of equity.
Source: Stock Market Liquidity in Chile, Luis Brandão-Marques, IMF Working Paper, November 16, 2016.
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- Stock Market Liquidity in Chile