System Liquidity Risk And Transaction Risk Impact On Stock Returns

Liquidity risk is the risk of loss when investors can not trade asset in reasonable price timely in stock market, while the systematic liquidity risk refers to the risk of loss when the liquidity of the whole market changes. The relationship between the liquidity and the stock returns is one of the hot points being discussed in many countries. However, the relationship between systematic liquidity risk and the stock returns hasn't been studied in China. The problem of private information has been concerned for a long time, the relationship between informed trade risk and stock returns is an important subject. The effects of systematic liquidity risk and informed trade risk on stock returns are studied in this paper.First, the relationship between the systematic liquidity risk and stock returns is studied. In this chapter, with the method proposed by Lubos Pastor and Robert F. Stambaugh(2002), the intraday data from January 2008 to September 2009 in Shanghai Stock Exchange is analysed. The empirical results show that the systematic liquidity risk has a significant influence on stock returns in 2008, however, the systematic liquidity risk doesn't have any significant influence on stock returns in 2009.Second, the relationship between informed trade risk and stock returns is also studied. With stocks from Shanghai 180 Index from January 2009 to December 2009, the probability of informed trade (PIN) of each stock is estimated with the method of maximum likelihood estimation. The relationship between informed trade risk and the stock price in each month is also studied. The results show that the probability of informed trades is about 0.46, however, informed trade risk does not have any significant effect on stock returns.The effects of PIN and systematic liquidity risk on stock price are also studied. The results show that the effects of PIN and systematic liquidity risk on stock price are different in different months. In most months of 2009, the informed trade risk does not have any significant effect on stock returns. Systematic liquidity risk has a negative effect on stock returns in three months, but systematic liquidity risk does not have any significant effect on stock returns in other months.