An Empirical Research Between Liquidity And Yield Of Chinese Concept Stocks

When it comes to asset pricing,today's financial researches and studies pay more and more attention in liquidity and liquidity premium theory.The traditional asset pricing theory is based on the assumption that the market's liquidity is sufficient,which could be hardly satisfied in real life.According to many academic studies,the level of liquidity affects the transaction in many ways.Liquidity affects the transaction costs and the expected return.Investors prefer high liquid stocks.If they invest low liquid stocks,their expected return will be higher to make up for the risk of the transaction.As an alternative channel for financing,listing in the USA has been favorable for Chinese companies.Yet in the US capital market,some of these Chinese companies' stocks are undervalued and have low liquidity.In 2015,there are even trend that many of the listed companies choose to delisted and return to domestic market,as called "return tide." Chinese concept stocks are unique because the main operational and management activities happened in the domestic while they get financing in the foreign capital market.This paper mainly discuss whether these stocks' liquidity are in accord with the liquidity premium theory,and whether their yield were affected by the illiquidity.This paper is consisted by five sections.Firstly,the introduction part describes the background and significance of the subject as well as pointing out the research ideas and innovation.The second part summarizes and reviews the thesis and theory of liquidity study and liquidity premium theory in the domestic and foreign research.The third part makes a comparative analysis and a case analyses to get a bird view of the liquidity and return status of Chinese concept stocks.The fourth part is to analyze return-liquidity relationship of Chinese concept stocks by using cross-section and time-series effects models.Liquidity is measured by illiquidity ratio ILLIQ,ROLL spread index and turnover.Size?BM are used as control variables,so the “small company effect” and BM effect can be also tested.Finally yet importantly,the paper will conclude the study and give proposals.The final empirical estimate result is that ILLIQ and the expected return have a significant positive correlation while ROLL spread index and turnover and expected earnings are significant negatively correlated.Therefore,return-liquidity relationship of Chinese concept stocks is in line with the liquidity premium theory.Expected illiquidity positively affects expected excess return and it has more influence on big companies.Unexpected illiquidity negatively affects contemporaneous return.