Understanding the Controversy of Liquidity Beta: A Natural Experiment
47 Pages Posted: 11 Dec 2014 Last revised: 21 Nov 2015
Date Written: November 11, 2015
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
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