Liquidity Risk Premium

Much literature in modern asset pricing theory focused on the rela-tionship between return and price risk,but paied little attention to the relationship between the liquidity risk and return.In recent years,as the liquidity risk often showed in a variety of financial crisis,liquidity has been paid more and more attention,the research on the liquidity and asset price has been a hot topic in theoretical and empirical Study.In this paper, we use the illiquidity measurement which is from Amihud 2002) as the liquidity agent variables and the LCAPM model in Acharya and Pedersen (2005) to test the liquidity premium problem of Shanghai A-share market. Unlike other empirical research, this paper constructed three different liquidity risk indicators: covariance of the assets' illiquidity and the return of the market, covariance of the asset return and the illiquidity of the market, the covariance of the illiquidity of the asset and the return of the market.Then,we examined the impact of the liquidity level and the three different liquidity risk on the return of aeest.In addition,this paper also analyzed the changes of liquidity risk premium before and after the share reform and the different character-istics of the liquidity risk premium between bull market andbear market.The results show that there is no price risk premium in the Shanghai A-sharemarket, but in most of the time, there is a significant liquidity risk premium.During the period of 2000-2008,there is liquidity risk premium whether the firm size is controlled or not.Before the reform of non-tradable shares(2002-2004),there is liquidity risk premium in the Shanghai A-share market,but after the reform (2006-2008), only the stocks with higher liquidity level have liquidity risk premium, while the stocks with lower liquidity lever does not show the liquidity risk remium.In the bull market(2006.1-2007.9), there is no liquidity risk premium in the Shanghai A-share market,however,in the bear market(2007.10-2008.12) there is liquidity risk premium.