Liquidity Risk and Cross-Sectional Returns: Evidence from the Chinese Stock Markets

Zhang, Feng; Tian, Yao; Wirjanto, Tony S.

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Liquidity Risk and Cross-Sectional Returns: Evidence from the Chinese Stock Markets

Finance Research Letters, Vol. 6, No. 4, 2009

22 Pages Posted: 21 Feb 2007 Last revised: 2 Nov 2010

See all articles by Feng Zhang

Feng Zhang

Southern Methodist University (SMU) - Finance Department

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: January 1, 2007

Abstract

This paper investigates whether systematic liquidity risk is priced by implementing an empirical test on the recently proposed float-adjusted return model. For testing purposes, we obtain an appropriate (and arguably unique) empirical measure of so-called liquidity beta based on Chinese stock-market data. The results show that systematic liquidity risk is priced with a premium of 6.7 percent annually, after we control for market risk, size, and book-to-market equity. In addition, we also find that size and book-to-market equity help explain cross-sectional variations in Chinese stock returns after we control for liquidity risk.

Keywords: Liquidity risk, systematic risk factor

JEL Classification: A00

Suggested Citation: Suggested Citation

Zhang, Feng and Tian, Yao and Wirjanto, Tony S., Liquidity Risk and Cross-Sectional Returns: Evidence from the Chinese Stock Markets (January 1, 2007). Finance Research Letters, Vol. 6, No. 4, 2009, Available at SSRN: https://ssrn.com/abstract=964310