The Research On Liquidity Premium、Contagion And Flight-to-Liquidity In The Stock Market

Individual investors who have less sense of risk management still dominate theChinese stock market. In order to purse high-yield asset, the investors often investassets in portfolio of higher expected return and lower liquidity, and Investor’sunderstanding of the liquidity risk is not enough. Since the ups and down of the stockmarket in2008, the investors’ demand for risk aversion has intensified and they haverealized that while pursuing of maximizing return on assets, they at the same timeshall guarantee the security of the assets. Most of the research literature suggests thatliquidity premium exists in the Chinese stock market. And the liquidity premium levelin a bear market is significantly higher than that in a bull market. What’s more, thereis contagion in a bull market and flight-to-liquidity in a bear market.Starting with a summary of the related research, this thesis, based on research athome and abroad, subdivides the bull market and bear market into four sub-stages: therecovery period, the rise period, the early recession period and the late recessionperiod. And then this thesis analyzes whether there is the liquidity premium in thefour sub-stages in the Shanghai A-share market with the data of2006-2010. Then onthe basis of clear definitions of the contagion and flight-to-liquidity, the thesis dividesstock portfolio into good liquidity stocks and illiquidity stocks; controls the influenceof common factor on the good liquidity stocks and illiquidity stocks; analyzes whetherthere is contagion and flight-to-liquidity over the four sub-stages; and finally uses theBehavioral Finance to explain the results.The empirical study draws conclusions which are different from the existingresearch: The first is that although the level of liquidity premium in a bear market ishigher than that in a bull market, the level of liquidity premium in the recovery periodin a bull market is higher than that in the late recession period in a bear market; thesecond is that there is flight-to-liquidity over the early recession period but ancontagion over the late recession period.