Liquidity And Asset Pricing: An Empirical Research Based On Chinese Securities Market

Asset pricing is the core part of modern finance. There are some difficulties to explain the imperfect financial market using the traditional capital asset pricing models. Building capital asset pricing model embodying market microstructure factors such as liquidity has become a major issue of financial research today.We examine the asset-pricing role of liquidity from liquidity level and liquidity risk of assets based on Chinese stock market in this paper. Furthermore, we examine the implication of liquidity risk for asset pricing form the point of whole market and portfolio. In the end, we propose the method of condition testing for the liquidity-adjusted capital asset pricing model and test the relationship of risk and return in Chinese stock market. The main contents of this paper are as follows:(1)We augment Fama-French three-factor model by building the liquidity level factor to set up four-factor model and examine the asset-pricing role of liquidity level. The findings show that the liquidity-augmented Fama-French model performs better than the Fama-French three-factor model, and there are systematic risk premium, size premium, book-to-market premium and liquidity level risk premium in China stock markets.(2)We build a three-factor asset pricing model to examine the implication of liquidity risk for asset pricing from the whole market in China Stock Market. The findings show that there are market risk premium, risk premium of market return sensitivity to aggregate liquidity level (or its relative change) and that of volatility of aggregate liquidity level (or its relative change).(3) The time-varying systematic risk and three forms of liquidity risk proposed by Acharya and Pedersen (2005) are calculated by dynamic conditional correlation multivariate GARCH model. The principal components regression is applied to examine the asset-pricing role of liquidity risk from the point of portfolio. The findings suggest that systematic risk, liquidity risks and nonsystematic risk are priced in Chinese Stock Market, and some channels for liquidity risk are not valued by investors. The asset-pricing role of liquidity level volatility is uncertain. Some factors distort the normal positive relationship between expected return and expected illiquidity.(4) We propose the method of condition testing for the liquidity-adjusted capital asset pricing model and test the relationship of risk and return for the Chinese A-shares stock market over the 2001-2003 period. The findings suggest that the three liquidity risks and its sum are very small compare to systematic risk, and so liquidity risks have very limited explanatory power on return in the frame of the liquidity-adjusted capital asset pricing model. There is a significant conditional relation between return and systematic risk, namely a significant positive (negative) relation between return and systematic risk, when market excess return is positive (negative), while the relation is asymmetrical during up and down markets. There is only a significant negative relation between return and the total liquidity risk during down market, so the relation is asymmetrical seriously.