Low Liquidity Beta Anomaly in China

40 Pages Posted: 11 Dec 2014 Last revised: 14 Jun 2021

See all articles by Michael Frömmel

Michael Frömmel

Ghent University - Department of Financial Economics

Xing Han

University of Auckland Business School; Ghent University - Department of Financial Economics

Youwei Li

Hull University Business School

Samuel Vigne

Trinity College (Dublin) - Trinity Business School

Date Written: November 11, 2015

Abstract

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

Frömmel, Michael and Han, Xing and Li, Youwei and Vigne, Samuel, Low Liquidity Beta Anomaly in China (November 11, 2015). Available at SSRN: https://ssrn.com/abstract=2536118 or http://dx.doi.org/10.2139/ssrn.2536118

Michael Frömmel

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, 9000
Belgium

Xing Han (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, 9000
Belgium

Youwei Li

Hull University Business School ( email )

University of Hull
Hull, HU6 7RX
United Kingdom

Samuel Vigne

Trinity College (Dublin) - Trinity Business School ( email )

Aras an Phiarsaigh
College Green
Dublin, Leinster D2
Ireland

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