Liquidity and Asset Pricing: Evidence from the Hong Kong Stock Market
Posted: 23 Dec 2011
Date Written: January 15, 2011
This study investigates the role of liquidity in pricing stock returns in the Hong Kong stock market. Our results show that liquidity is an important factor for pricing returns in Hong Kong after taking well-documented asset pricing factors into consideration. The results are robust to adding portfolio residuals and higher moment factor in the factor models. The results are also robust to seasonality, and conditional-market tests. We also compare alternative factor models and find that the liquidity four-factor model (market excess return, size, book-to-market ratio, and liquidity) is the best model to explain stock returns in the Hong Kong stock market, while the momentum factor is not found to be priced.
Keywords: liquidity, turnover ratio, asset pricing, Hong Kong stock market, factor model
JEL Classification: G12, G15
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