What Drives the Liquidity Premium in the Chinese Stock Market?

The North American Journal of Economics and Finance, Forthcoming

Posted: 25 Jun 2020

See all articles by Jiyoun An

Jiyoun An

Kyung Hee University

Kin‐Yip Ho

Australian National University (ANU)

Zhaoyong Zhang

Edith Cowan University - Faculty of Business and Law

Date Written: October 11, 2019

Abstract

This paper examines the dynamics of the liquidity premium in the Chinese stock market by adopting a multivariate decomposition approach to measure the individual contributions of various driving forces of the premium (such as firm size, idiosyncratic volatility, and market liquidity betas). By employing a wide range of liquidity measures, we show that liquidity premium is generally significant in the Chinese stock market. Furthermore, this premium is increasing in recent years starting from 2011; this observation is different from the United States market, in which the premium has declined over the years. Moreover, the multivariate decomposition approach highlights several asset pricing factors as the main driving forces of the premium. Based on the Amihud liquidity measure, the decomposition approach indicates that the size factor contributes 45–65% to the liquidity premium. However, the measure based on turnover suggests that idiosyncratic volatility accounts for at least 60% of the liquidity premium. In contrast, the global market liquidity beta does not significantly contribute to the premium. However, there is some evidence that the local market liquidity beta has become more significant in its impact on the premium during the period from 2011 to 2015. Our results imply that the findings on the liquidity premium in the Chinese stock market could be sensitive to the liquidity measure used and period of analysis.

Keywords: Liquidity premium; Size; Idiosyncratic volatility; Global market beta; Local market liquidity beta; Chinese stock markets

JEL Classification: G12, G15, M41

Suggested Citation

An, Jiyoun and Ho, Kin‐Yip and Zhang, Zhaoyong, What Drives the Liquidity Premium in the Chinese Stock Market? (October 11, 2019). The North American Journal of Economics and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3617647

Jiyoun An (Contact Author)

Kyung Hee University ( email )

1732 Deogyeong-daero
Giheung-gu
Yongin-si, Gyeonggi-do, Gyeonggi-Do 17104
Korea, Republic of (South Korea)

HOME PAGE: http://kic.khu.ac.kr/

Kin‐Yip Ho

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

Zhaoyong Zhang

Edith Cowan University - Faculty of Business and Law ( email )

Accounting, Finance and Economics
100 Joondalup Drive
Joondalup 6027, WA 6027
Australia

HOME PAGE: http://www.ecu.edu.au/staffdir/details.fcgi?ref=odrrfgSFeI.

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