Is Illiquidity Priced in the Chinese Stock Market?

53 Pages Posted: 22 Mar 2021

See all articles by Jun Liu

Jun Liu

Tilburg University - TIAS School for Business and Society

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Lang Zheng

Central University of Finance and Economics (CUFE)

Date Written: February 17, 2021

Abstract

Although liquidity has received wide attention in asset pricing literature over the past decades, how stock liquidity is priced in emerging markets remains unclear. We find that liquidity plays an important role in explaining the cross-section and time-series variation in expected returns by incorporating multi-dimensional liquidity proxies in the spread, depth, and trading activity. The predictive power persists after controlling the several conventional pricing factors. We also find that the high illiquidity quintile generates higher monthly risk-adjusted returns than the low illiquidity quintile, ranging from 3.2% to 8.4% per month. The results are robust to alternative stock liquidity measures and sampling criteria. Our findings highlight the profitability of liquidity-based trading strategy in the Chinese stock market.

Keywords: stock liquidity, illiquidity premium, stock returns

JEL Classification: C12, G15, G10

Suggested Citation

Liu, Jun and Wu, Kai and Zheng, Lang, Is Illiquidity Priced in the Chinese Stock Market? (February 17, 2021). Available at SSRN: https://ssrn.com/abstract=3787113 or http://dx.doi.org/10.2139/ssrn.3787113

Jun Liu

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Lang Zheng

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

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