Liquidity Risk and Cross-Sectional Returns: Evidence from the Chinese Stock Markets
22 Pages Posted: 21 Feb 2007 Last revised: 2 Nov 2010
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
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