Research On Liquidity Risk Premium And Asset Pricing Based On Chinese Stock Market

Study on liquidity risk premium and asset pricing has been one of the mostchallenging work in finance field in recent years. Traditional asset pricing theoriesonly consider market risk and thus liquidity risk is ignored, but more and moreempirical researches show that liquidity risk is also a systemic risk and affects assetprices. Many researchers have tried to introduce liquidity risk to classic asset pricingtheories, and have achieved some interesting and valuable results.Based on the recent asset pricing theories, this paper investigates the liquidity riskpremium in Chinese stock market and the pricing of risky asset. The paper consistsof eight chapters involving the four main sections. Firstly, the paper empiricallystudies size effect and value effect and liquidity risk premium in Chinese stockmarket, through testing the validity of the CAPM, the improved Fama three-factormodel and the two-factor CAPM with liquidity by using two estimation methods ofOLS and GMM. Secondly, the paper analyzes the relationship between the riskfactors such as liquidity and firm size and book-to-market ratio that lead to the marketanomalies by using cointegration test and Granger causality test, and buildingdynamic multivariate regression models, VAR and VEC. The results are prepared forthe next pricing of liquidity risk and asset. Thirdly, the paper discusses the pricing ofmarket risk and liquidity risk under martingale measure by employing the no-arbitrageidea of financial calculus and finance engineering, and then constructs the pricingformula of liquidity risk premium. Finally, from the view of composition of risk, aliquidity risk-adjusted capital asset pricing model (LACAPM) is therefore established.The originalities of this paper are reflected in the following aspects:（1）The systematically analyses are conducted over market anomalies forChinese stock market including liquidity risk premium and size effect and value effect.Studies show that the CAPM can not explain market anomalies, and the improvedFama three-factor model can only explain value effect, but can not explain size effectand liquidity premium, and the validity of the two-factor CAPM with liquidity in explaining market anomalies depends on the liquidity measure. The two-factor CAPMbased on two liquidity measures of turnover and illiquidity ratio can not only explainsize effect and value effect, can also better explain the liquidity risk premium.（2）The correlation between the risk factors affecting market anomaliesincluding liquidity and firm size and book-to-market ratio are explored. Grangercausality test shows that there are no Granger causal relations between company sizeand book-to-market ratio, between turnover and illiquidity ratio, that is, the laggedvariable of one variable does not affect another variable. But firm size has strong Grangercausality on book-to-market ratio after turnover and illiquidity ratio are considered，and thereversal does not exist. The test proves that there exists bilateral Granger causalitybetween turnover and the volatility of firm size. Though turnover and illiquidity ratioand the volatility of firm size have no obvious effect on the volatility ofbook-to-market ratio respectively, all three variables together have a significantimpact on the volatility of book-to-market ratio when lag intervals are long enough(12months). The dynamic regression models, the VAR and the VEC also indicate that,either on firm size and book-to-market ratio their own, or on their volatilities, turnoverand illiquidity ratio have significant explanatory power.（3）The market prices of market risk and liquidity risk under martingale measureare provided, and the liquidity risk measure of the fully diversified portfolio is alsooffered, so the quantification of liquidity risk premium of the diversified portfolio(such as the diversified fund) is solved.（4）The liquidity risk measure of a single asset and the market price of liquidityrisk are proposed from the view of composition of risk, liquidity risk-adjusted capitalasset pricing model LACAPM with two types of the relative amount of risk and theabsolute volume of risk is constructed.The research extends the ideas of the recent research of asset pricing models andprovides liquidity risk measure and asset pricing with a new method. Therefore, theworks make some contributions to the development of asset pricing theories，methodsand applications in investment decision and risk management.