Empirical Study About Liquidity Premium And Asset Pricing Model

The relation between liquidity and asset pricing is an important branch in the numerous liquidity research. It is the most important issue whether liquidity is a factor to determine asset price, namely whether liquidity has important influence to asset rates. Theoretically, the asset facing bad liquidity will be at a relative low sale price in order to compensate for liquidity risk. The asset expected return is better than the asset which sell good. The traditional asset pricing model is based on perfect assumptions and does not consider or explain the phenomenon of liquidity premium which has a great impact on the existing asset pricing model.Based on the previous research made by Chinese and foreigners, a new liquidity measure was constructed in this paper over the period from July 2000 to June 2010. This measure captures multiple dimensions of liquidity, with particular emphasis on trading speed. The new liquidity measure is highly correlated with the commonly used bid-ask spread, turnover and return-to-volume measures. However, the new liquidity measure is materially different from existing measures. The new liquidity measure examine the phenomenon of liquidity premium according to the measure of new multi-dimensional liquidity which grouping the stocks. It can be proved the existence of liquidity premium, if the return of stock investment portfolio which has worst liquidity surpasses the best. This empirical study also illustrate that the traditional CAPM model and Fama-French three factor model can not explain the phenomenon of liquidity premium. The LCAPM model can explain liquidity premium according to introducing the liquidity factors to the traditional CAPM. In addition, many domestic and foreign researchers find that stock market exist market anomalies such as size effect and book to market effect.Thus, LCAPM model can explain the market anomalies existing Chinese stock market. So LCAPM is used to explain such anomalies, and it is proven that the model is able to explain the anomalies which can not be explained by traditional asset pricing model. The research have the positive effect for the improvement of asset pricing model research in our country. The paper draws the following main constructions according to the empirical analysis:1. Similar to the overseas mature capital market,the correlation of stock market's liquidity and expected return is negative,namely liquidity premiun phenomenon exists obviously.2. The traditional asset pricing model is based on perfect assumption, namely the market is frictionless, no transaction costs and investors can trade any number of consecutive without affecting the price of securities. The empirical study find that the traditional pricing model and the Fama-French three factor model can not explain the liquidity premium.3. The LCAPM model is built by adding the multi-dimensional liquidity to the traditional asset pricing model CAPM.The model can explain the liquidity premium which the traditional pricing model can not explain.4. There exist the size effect and book to market effect. The empirical analysis proved that the LCAPM model can explain these market heteromorphisms.