Research On Liquidity Premium And Market Efficiency---based On LA-CAPM Model

This paper claims the main reason of conclusion that traditional capital asset pricing model has failed in Chinese capital market is traditional model has not considered market efficiency. Then, this paper starts in researching liquidity measuring index, which can also represent market depth, breadth and market flexibility. Here use non parametric test method on China’s securities market to prove liquidity premium phenomenon, the result is stock return and its liquidity level are negatively correlated.This paper considers that liquidity risk belongs to systemic risk category, and we often use traditional beta coefficient to measure systemic risk, so this paper attempts to construct the liquidity adjusted beta coefficient. Here introduce the liquidity index matrix, then using the weight regression method to constitute excess return regression version of one new CAPM which has added liquidity factor. That is LA-CAPM model.At last, based on the seven-year (2005.1-2011.12) data of Chinese stock market in real estate industry, this paper tests LA-CAPM of Sharp-Linter version using the t-test. It carries out not only the single stocks but also the portfolios for both the whole period and two partitioned periods. In the end, we make four conclusions. Firstly, in real estate industry, there is no significant evidence to reject LA-CAPM while almost all the mean-variance efficient portfolios, constructed by the single stocks, are rejected in terms of LA-CAPM more easily and have positive alpha coefficients. Secondly, compared with empirical results of traditional CAPM, the modified model has stronger explanation, so every stock’s excess return adjusted by its liquidity will be smaller. Thirdly, the expected return of mean-variance efficient portfolios is higher, refusing strength of LA-CAPM is much stronger. Fourthly, non-tradable shares reform significantly improves market efficiency.