Liquidity Premium Empirical Study-Based On Chinese A Share Market

Asset pricing has been one of the most popular fields of finance. Capital Asset Pricing Model (CAPM) indicates that the expected return can be explained by the stock market risk, which indiacates that the bigger the market risk and the greater the expected return of the stock, the smaller the market risk and the lower the expected return of stocks. However, some scholars found that the capital asset pricing model can not fully explain the returns ofstock,which is called market anomaly.Such as size effect、B/M effect and Liquidity Risk Premium and so on.Banz first discovered the size effect,which means that a small company stock portfolio monthly had higher profits than the combination of big companies that the larger the company, the lower the portfolio returns, the smallert the company, the higher the portfolio returns. Rosenberg found that the B/M effect, which means that the smaller book value to market value,the lower the portfolio return.Amihud and Mendelson first proposed the liquidity premium theory in1986. Highly liquid stocks have lower earnings in the future, a combination of low liquidity stocks have higher returns in the future. Therefore, liquidity is also an important factor for asset pricing.Later, a large number of empirical studies found that size effect、the book market ratio effect and liquidity risk premium effect prevalent in all European countries. In emerging market countries, there is a positive correlation between liquidity and earnings. Rouwenhorst used IFC data from20emerging market countries,who found empirical results show that small stocks of large companies gain higher stock returns, but high turnover portfolio of stocks have higher earnings.that is,liquidity and earnings were positively correlated. Liquidity risk premium can not be found in emerging market countries. Bekaert used data from Standard&Poor’s Market19emerging market countries as a sample empirical analysis,which found that the stock’s liquidity and earnings lagged positive correlation. Jun used data from a sample including27emerging market countries, empirical findings between stock returns in various countries and the average turnover rate was positively correlated.So far, the liquidity risk premium theory has been very mature, but differrent sample data, or select a different measurement methods, the empirical results vary greatly. For example, using data from developed European countries, the empirical findings indicate that liquidity risk premium phenomenon clearly exists. But emerging market countries liquidity risk premium is not obvious presence. Domestic research on liquidity risk premium is more, such as,Dong Wei Su and Yuan Xun Mai found that high transaction costs and the translation of low stocks have the high expected future earnings, China’s stock market has a significant liquidity premium and transaction costs led to a liquidity risk premium, trading frequency has no effect on the liquidity risk premium. Zheng Zhang and Li Liu found turnover and stock returns were negative correlation in cross-section, and further explored the reasons for the existence of a negative correlation, they found that the liquidity risk premium can not fully explain the negative correlation between heterogeneous beliefs and investors Short market constraints, speculative trading that caused the stock was overvalued was a better explanation.This paper documents liquidity premium whether exist Based on The Shanghai And Shenzhen A Share Market throght CAPM model and FAMA three factors. Empirical results show that size effect and liquidity risk premium phenomenon exist. Moreover, the liquidity premium phenomenon exists only in a bear market,which is can not be found at the bull market.So exactly how do explain these visions? In this paper, Fang Liu and Wei Zhang (2011) of LACAPM model to explain the phenomenon.Empirical findings that LACAPM model can not explain the size effect and liquidity risk premium phenomenon based on a single non-liquidity indicators and turnover LACAPM model based on the arithmetic average of the illiquidity indicators and turnover can be a good explain size effect and liquidity risk premium phenomenon.At the same time,we can draw a conclusion that a single liquidity indicators in explaining the market anomaly may not get a reasonable conclusion.