Abstract

In this paper, we propose a new approach, wavelet analysis for investigating the relationship between liquidity and stock returns in the Brazilian market over different time scales. To that we used daily quotations of the Ibovespa from January, 2002 to April, 2010, totalizing 2049 observations. As proxy of liquidity, we used the measure proposed by Amihud (2002). The descriptive results appointed for a solidification of the Brazilian market in terms of financial volume, beyond the stabilization in the general liquidity. Further, we verified the existence of a liquidity premium considering the distinct negotiation frequency scales. The results confirmed some previous studies, indicating that in the Brazilian market, keep illiquidity assets in a portfolio has a cost in the form of an extra return. Nonetheless, the finest scales exhibited higher values for the parameters of the illiquidity in the regressions. This fact is associated with the need of the short-time investors, which correspond to the speculative capital, than that of the long-term conservator ones.

Key words: Brazilian market, liquidity risk, wavelets, scales.