Liquidity, Liquidity Risk and Stock Returns: Evidence from Japan

26 Pages Posted: 12 Dec 2013

See all articles by Bo Li

Bo Li

affiliation not provided to SSRN

Qian Sun

Fudan University

Changyun Wang

Renmin University of China

Date Written: January 2014

Abstract

This paper investigates‐whether liquidity and liquidity risk are priced in Japan. Using modified Amihud illiquidity measures, we find both cross‐sectional and time series evidence that liquidity is priced in the Japanese stock market during the period 1975–2006. The evidence is largely consistent with Amihud's (2002) findings in the US market. We further employ the liquidity‐adjusted CAPM proposed by Acharya and Pedersen (2005) to examine whether liquidity risk is priced in Japan. Consistent with Acharya and Pedersen's findings in the US, we show that liquidity risk is priced in the stock market, in addition to the liquidity level. These findings strengthen the confidence that liquidity is a determinant of stock returns.

Keywords: liquidity, Amihud illiquidity measure, liquidity‐adjusted CAPM, Japan

Suggested Citation

Li, Bo and Sun, Qian and Wang, Changyun, Liquidity, Liquidity Risk and Stock Returns: Evidence from Japan (January 2014). European Financial Management, Vol. 20, Issue 1, pp. 126-151, 2014, Available at SSRN: https://ssrn.com/abstract=2366597 or http://dx.doi.org/10.1111/j.1468-036X.2011.00629.x

Bo Li (Contact Author)

affiliation not provided to SSRN

Qian Sun

Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China
86 21 25011094 (Phone)

Changyun Wang

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

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