The Empirical Research On The Relationship Between Liquidity And Returns Of The Stock Market In China

The relationship between liquidity of stock market and the assets' returns is essentially the issue of liquidity asset pricing. Lots of western scholars began their study of this problem early at the last 1980's and finally they proposed a new theoretics which is called liquidity premium. After more than 20 years, the relationship between liquidity and assets' returns still cannot reach a final conclusion because of the constantly changing of liquidity and market difference between countries although the theoretical and empirical research has been mature.Nowadays, the world is suffering from a big storm of the financial crisis and the financial market shows an unprecedented fluctuation. Under this circumstance, this paper use the latest sample data which is consist of 40 months of 399 A-shares of Shanghai and Shenzhen Securities Exchange, two variables - turnover and ILLIQ as the proxy to test the changing of market liquidity and the relationship between liquidity and assets' returns of our country after the share-trading reform. It is found that during that period the liquidity in our market is changing greatly and there is obvious co-movement phenomenon in the two stock markets of our country. In the meanwhile, The prevalent phenomenon which is called "illiquidity premium" appeared in the western countries is not show in our stock market but there are obviously relativity between the liquidity and returns. Finally, we found that the liquidity of market and portfolios are strengthen mutually, that is the well-known market effect called "liquidity substitution". In the empirical part, we also found that the proxy ILLIQ cannot pass the Granger Causality Test and have no explanatory power for the equation. Otherwise, the Granger Causality Test of turnover and market liquidity is also abnormal, maybe it is caused by the irrational reaction of the investors.In conclusion, this paper found that selection of the measure index has a important influent on Chinese stock market liquidity; the liquidity of assets' and market are strengthen mutually so that this factor is vital to the return of stock market of China.