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Liquidity Risk and Cross-Sectional Returns: Evidence from the Chinese Stock MarketsFeng ZhangUniversity of Utah - Department of Finance Yao TianUniversity of Alberta - School of Business Tony S. WirjantoUniversity of Waterloo, School of Accounting & Finance and Department of Statistics & Actuarial Science January 1, 2007 Finance Research Letters, Vol. 6, No. 4, 2009 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.
Number of Pages in PDF File: 22 Keywords: Liquidity risk, systematic risk factor JEL Classification: A00 Accepted Paper SeriesDate posted: February 21, 2007 ; Last revised: November 2, 2010Suggested CitationContact Information
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