Liquidity Risk and Cross-Sectional Returns: Evidence from the Chinese Stock Markets
University of Utah - Department of Finance
University of Alberta - School of Business
Tony S. Wirjanto
University of Waterloo, School of Accounting & Finance and Department of Statistics & Actuarial Science
January 1, 2007
Finance Research Letters, Vol. 6, No. 4, 2009
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: A00Accepted Paper Series
Date posted: February 21, 2007 ; Last revised: November 2, 2010
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