Theoretical Model And Empirical Study Of Asset Pricing Based On Liquidity

Asset pricing has always been the focus of financial research.The traditional asset pricing model assumes that the capital market is full of liquidity,without any form of trade friction.However,any capital market can not have complete liquidity in reality.In capital market investors will face liquidity constraints when they trading financial assets.It is critical to add liquidity in asset pricing theory.This paper focus on the type of liquidity risk and the channels through which liquidity factor of an asset is related to its expected return.Firstly,this paper studies the relationship between liquidity and asset pricing in theory.Based on the optimization of the utility of investment,we sets up a liquidity-adjusted asset pricing model.On basis of the M-LCAPM model,this paper proposes that liquidity of security is related to its expected return through two channels;namely: expected liquidity and liquidity risk.The expected liquidity is transaction cost.The liquidity risk includes systematic liquidity risk and individual liquidity risk.Secondly,this paper test the validity of the model in the Chinese stock market by using the data of A-share listed companies in Shanghai market and Shenzhen market.The study proves that security's required returns depends on its expected liquidity,systematic liquidity risk and individual liquidity risk.Moreover systematic liquidity risk have crucial effect on security's required returns.Then this study finds that the influence of expected liquidity,systematic liquidity risk and individual liquidity risk on the small and high book-to-market ratio firm's stock return is more obvious.The investors need to pay special attention to the expected liquidity,systematic liquidity risk and individual liquidity risk when they invest in those security.We find that in a bull market,investors pay more attention to the expected liquidity,but in a bear market,investors pay more attention to the systematic liquidity risk.In the last,this paper analyses the application of the model in portfolio optimization.The systematic liquidity risk is the highest contribution to the risk premium of the stock return.The portfolios which based on the systematic liquidity risk have the highest sharp ratio.With the Chinese stock market is becoming more mature,systematic liquidity risk is the key factor that affects the expected return rate of stock.