An Empirical Study On The Effect Of Stock Liquidity And Volatility Of Liquidity Information On The Asset Pricing

The traditional liquidity asset pricing describes expectation equation of theliquidity asset pricing, but it doesn`t distinguish and depict asset pricing mechanismand difference under different quantile levels. We need to recommit the relationshipbetween asset pricing and liquidity level under different quantile levels. Second, stockliquidity has also appeared significantly reduced since asset liquidity declined afterthe2008financial crisis, and academics pay great attention to that whether there aresome relationships between them. In addition the fluctuation of the liquidity has beenbothering the investors because the investors who trade at random time points care notonly the average level of liquidity but also the distribution of the liquidity`sfluctuation. The paper includes three aspects:1. We use quantile regression theory to study the relationship between liquidityand asset pricing. We select listed companies in the stock markets of Shanghai andShenzhen from2007to2010as research object and use quantile regression method totest multi-factor asset pricing model. The study find that asset pricing includeliquidity factor can be better explained as we use ILLIQ to measure liquidity levelwhen yields are in high quantile level. That is the greater the ILLIQ is, the worse thelevel of liquidity is, and the higher yields results.However, it is better to use turnoverrate when yields are in low quantile level because turnover rate is significantlynegatively correlated with yields at this time.2. We study the volatility of liquidity. By using the illiquility to measure the levelof liquidity and daily data to capture the volatility of liquidity, and usingFama-MacBeth regressions and the portfolio approach to analysis the relationbetween the stock’s expected return and its volatility of liquidity.We find that apositive relation between them, but not significant. We argue that investor dislike thevolatility of liquidity due to the potential of large downside movements in liquidity.and require a risk premium for holding stocks with high variation in liquidity.3.We study how the liquidity of asset influences the liquidity of stock. Weconstruct a theoretical model to set the stock liquidity tied to the liquidity of assetwith corporate financial decisions. The conclusion in the model is that it depends onthe value of parameter whether they are positively correlated or negativelycorrelated.In addition we use ILLIQ of944listed companies under intraday low-frequency data to measure stock liquidity and do some empirical research withthe three kind of asset liquidity index. The empirical results conclude that they have asignificantly positive correlation. The agreement between theoretical analyses andexperimental results shows the worse the growth and the financing environment ofenterprises is, the more prominent the positive relationship is. Finally we use thetheoretical model to reveal the reason of the change of stock liquidity in listedcompanies innovatively and the contribution cash makes to firm value.