Financial market liquidity, returns and market growth: evidence from Bolsa and Börse, 1902–1925

The article is based on a unique data set of securities traded on the Madrid <italic>Bolsa</italic> and the Zurich <italic>Börse</italic> between 1902 and 1925. We examine the pricing of liquidity and demonstrate that the liquidity level of securities was an important determinant of cross-sectional returns. Factors that are usually found important in contemporary markets, such as securities' sensitivity to market-wide liquidity shocks and market movements, turn out to have been irrelevant in the early twentieth century. In addition, the illiquidity of the Madrid market appears to have modestly slowed capital raising there. Our results suggest that market liquidity was an important determinant of the growth and development of financial markets.