Understanding the Controversy of Liquidity Beta: A Natural Experiment

47 Pages Posted: 11 Dec 2014 Last revised: 21 Nov 2015

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

Date Written: November 11, 2015

Abstract

The conventional, risk-based view on liquidity beta is often a dismal story for empirical data. We propose a competing, sentiment-based view on the reversed pricing pattern of liquidity beta in China: High liquidity beta stocks underperform low liquidity beta stocks by 1.17% per month. The striking pattern is robust to different weighting schemes, competing factor models, alternative liquidity measures, and other well-known determinants of cross-sectional returns. Consistent with our new perspective, liquidity beta is a negative return predictor at firm level. Moreover, the return differential between high and low liquidity beta stocks is more dramatic following high market liquidity periods.

Keywords: Liquidity, Liquidity Beta, Investor Sentiment, Asset Pricing, China

JEL Classification: G12, G15

Suggested Citation

Frömmel, Michael and Han, Xing, Understanding the Controversy of Liquidity Beta: A Natural Experiment (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 )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, 9000
Belgium

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