Low Liquidity Beta Anomaly in China
40 Pages Posted: 11 Dec 2014 Last revised: 14 Jun 2021
Date Written: November 11, 2015
The conventional risk-based theory does not reconcile with the liquidity-beta anomaly in China: Low liquidity-beta stocks outperform high liquidity-beta stocks on a risk-adjusted basis. This striking pattern is robust to different weighting schemes, competing factor models, and other well-known return determinants in the cross section. We propose a competing behavioral-based explanation on the low liquidity beta anomaly in China. Consistent with our new perspective, liquidity beta is a negative return predictor in the cross section. Moreover, the time variation of the return differential between low and high liquidity beta stocks is led by investor sentiment after accounting for other possible economic mechanisms.
Keywords: Liquidity, Liquidity Beta, Investor Sentiment, Asset Pricing, China
JEL Classification: G12, G15
Suggested Citation: Suggested Citation