The Research On Stock Liquidity Premium Based On Component Analysis And Seemingly Unrelated Regression

Redistributing investment is the fundamental function of stock markets, as a result, liquidity is vitality of stock markets. If lack of liquidity causes transaction difficulty, market will lose its fundament. Liquidity of stock is also an important part of capital market micro-structure theories. Whether the degree of assets' liquidity effects assets' price is an important issue in the field of capital market theory and theoretical foundation of investment decision-making. Although liquidity's importance to stock market is notable, it is difficult to define and describe. Different angles and perspectives have been explained by scholars. When the different liquidity measures are adopted, the research results will be converse. Hence, a new multi-dimensional liquidity measure is necessary to bring to being to estimate stock liquidity and study how stock liquidity effects expected return.In this paper, sorts of stock liquidity measures are compared firstly. Then, based on principal component analysis, we get a new liquidity measure by using high-frequency data to measure the stock liquidity in China. Seemingly unrelated regression method is taken to examine if the liquidity premiums exist, and the final empirical study shows that there are liquidity premiums in both two market. At the same time, we find that scale effect and value effect exist in Shanghai stock market while there is only value effect in Shenzhen stock market. Lastly, policy recommendations are also provided based on empirical study.