Research On The Illiquidity Premium Based On The Perspective Of Trading Cost

This paper studies the illiquidity premium of equity, based on the perspective of trading cost, using the trading data of Shanghai a-share market from 2001 to 2014. The whole article includes two parts, inspecting the applicability of low-frequency liquidity indicators and empirical research on illiquidity premium of Shanghai a-share.In the first part, the paper sets Rosch and Kaserer’s high- frequency indicator volume-weighted-spreads as the benchmark, and investigates the applicability of the low- frequency indicators in measuring the stock liquidity by using split transaction data. Our analysis shows that Zhou Fang and Zhang Wei’s indicators performs better in measuring the illiquidity than Amihud and Illiq_ Zero, and turnover is the worst in all indicators. Besides, as the frequency decreases from day to month, the overall correlation between low-frequency indicators and benchmark is increased.The second part of paper, we based on the perspective of trading cost, and investigate the premium about liquidity level and liquidity risk(beta2, beta3 and beta4) by Acharya and Pedersen’s liquidity adjustment CAPM model. The study shows that liquidity level and liquidity risk have a positive effect on average equity return. We also find the effect of liquidity on stock returns is weak between 2001 and 2006, and becomes stronger since 2007. The paper also respectively examines the influence of equity illiquidity in the bull, bear and sideways market, and finds that illiquidity has a stronger effect on equity return during the bull and the bear period than the sideways. Besides, the research shows that liquidity risk beta4, sensitivity of the individual stock illiquidity to the market return, influences the stock return more than other during the bull and bear stage. And liquidity risk beta2, sensitivity of the individual stock illiquidity to the market il iquidity, acts a more important role during the sideways adjustment stage.