A Study On The Liquidity Measure And Illiquidity Risk Premium Of China Stock Market

Liquidity is the important attribute of security market. When marketparticipators valuate their financial products and manage their investmentportfolios, or when security supervise departments carry out their relatedpolicies, liquidity have been usually supposed exit fully. However, it isunfortunate, the fragile essence of liquidity often displays in front of uswith the form of violent change. For instance, in the market collapse of1987 as well as the financial crisis of Asia and Russia in a few years ago,liquidity disappears suddenly on the stock market of a lot of countries andareas, has brought serious negative influence to entire financial systemand even the steady operation of global economy. We carry out thetheoretical research for liquidity in continuous auction market and theempirical study using Shanghai and Shenzhen stock exchanges' trade datain this dissertation.In chapter one, we give the brief description of liquidity problem.First, we discuss the background of liquidity problem, the liquidity'sconcept and intention, and the purpose of this research. Then we give a review of domestic and foreign literature of liquidity research. Finally, wepoint out some limitations of domestic and foreign liquidity research,give the framework of our research and some innovation in this paper. Inchapter two, we study the form and offer mechanism of stock liquidity,and build a liquidity supply and demand model of the continuous auctionmarket. In chapter three, we discuss multiple attribute and measuremethod of liquidity, create a new liquidity uniform measure. In chapterfour, we analyze the liquidity of Shanghai and Shenzhen stock exchanges.In chapter five, we study empirically the effects of stock illiquidity onstock return, employing the transactions data from Shanghai andShenzhen stock exchanges. Results are as follows: 1.Turnover rate andbid-ask spread which are often used to measure China stock marketliquidity are not suit to China; 2. In a long period, there are no significantdifferences between Shanghai and Shenzhen market liquidity. But in 2004and 2005, Shenzhen market liquidity was significant better than Shanghai.3. Stocks liquidity has a negative correlation with equity shares and theperformance of company, but has no obvious relation to stock price;4.The expected stock returns are a decreasing function of liquidities,which proves that illiquidity premium exists in China stock market.