Liquidity, Liquidity Premium And Pricing Implication

This paper uses the data of U.S. stock market from1926to2010and examines High-Low spread estimate in detail proposed by Corwin and Schultz (2012).This paper mainly tests liquidity premium of High-Low spread estimate to study implication of asset pricing.Meanwhile,this paper compares High-Low spread estimate with other four popular liquidity measures by liquidity premium and pricing implication.The four popular liquidity measures contain price impact measure of Amihud(2002),turnover, trade discontinuity measure of Liu (2006) and bid ask spread of Amihud and Mendelson (1986).At last,this paper exams empirical results and further analyzes empirical results of liquidity measures in pre-1963period(1926to1963) and post-1963period (1963to2010).This paper finds the high-low spread exists significant liquidity premium and pricing implication from1926to1963,the empirical results are consistent with Corwin and Schultz (2012),namely High-Low spread estimate performs better in the early times.However,High-Low spread estimate exists positive liquidity premium and asset pricing models can explain the abnormal returns of the portfolios within limits from1963to2010.In the entire sample period, High-low spread estimate can get significant liquidity premium and asset pricing models can explain the abnormal returns of the portfolios within limits.Comparative analysis indicates that High-Low spread exists significant liquidity premium and pricing implication from1926to1963, moreover,High-Low spread estimate and other popular liquidity measures perform poorer from1963to2010.This paper has a new discovery,namely High-Low spread estimate exists significant difference between the pre-1963period and the post-1963period,and other four popular liquidity measures also exist significant difference between the pre-1963period and the post-1963period. This paper finds that the change of market liquidity leads to these differences. This paper firstly tests High-Low spread estimate, and provides comprehensive examination of liquidity premium and pricing implication, and studies High-Low spread estimate thoroughly. In theory, our study is conducive to define a robust liquidity measure, provide examination of liquidity premium and pricing implication for liquidity measures, support the research of liquidity and asset pricing.In practice, investors and company managers can make investment decision based on High-Low spread estimate.