Liquidity,Liquidity Risk And Asst Pricing

Asset pricing is one of the core contents of financial theory.Capital market participants and researchers have been trying to figure out and model how the price of the asset is formed and fluctuates so as to guide the investment behavior.The global financial crisis made people profoundly aware of the important impact of liquidity on asset prices.In a time of crisis when asset prices fall sharply,market liquidity drys up,transaction costs rise suddenly,normal order of capital markets will be disrupted,and the asset prices cannot reflect the real value.Not only in the time of crisis but also in normal time,liquidity is an important factor that affects asset prices,because the expected return of the assets which is relatively more active tends to be lower under the same conditions.Therefore,liquidity and liquidity risk have become the hot spots of financial theory.An asset pricing model applicable the special and developing Chinese stock market is needed.For the Chinese stock market which has established for more than 20 years but still in development and growth,the issues of whether and how liquidity and liquidity risk affect asset return,whether stock price synchronicity correlates to liquidity are worth discussing and thinking.This paper studied the relationship between liquidity and stock price synchronicity,discussed the liquidity premium and liquidity risk premium using Chinese stock market trading data.By comparing systematic volatility and heterogeneity volatility,Amihud illiquidity and the bid-ask spread,standard deviation and conditional heteroscedasticity of liquidity risk,liquidity premium and liquidity risk premium,we found that:1.The stock price synchronicity significantly positive correlates with liquidity.For an individual stock the higher stock price synchronicity,the better its liquidity.After controlling the heterogeneity volatility,the systemic volatility and liquidity of stocks still showed a negative correlation relationship.2.Stock return shows liquidity premium and liquidity risk premium and investors ask payment both for illiquidity and liquidity risk.Liquidity premium will not disappear depending on the overall market conditons,but the liquidity risk premium will be different on conditions of market trend.3.The empirical results may offset the theoretical expectations due to the inclusion of current information when using standard deviation or variance as a measure of liquidity risk.But investors are more concerned about the situation when the market is suddenly illiquid,especially the situation when the market is suddenly much illiquid in a down trend.For this reason,the relation between stock return and liquidity risk is not consistent under a bear market or a bull market.4.Even after controlling turnover rate,the above conclusion still holds because the turnover rate is not a good measure of liquidity.Turnover rate,Amihud illiquidity and bid-ask spread measure different dimensions of market liquidity;5.When calculating SMB and HML factor,the choice of circulation market value weighted or the total market capitalization weighted has significant effect on the empirical results.Besides that,the regression coefficient significance has great difference in a bear market or a bull market.