Title

What drives the liquidity premium in the Chinese stock market?

Document Type

Journal Article

Publication Title

North American Journal of Economics and Finance

Volume

54

Publisher

Elsevier

School

School of Business and Law

RAS ID

30606

Comments

An, J., Ho, K. Y., & Zhang, Z. (2020). What drives the liquidity premium in the Chinese stock market?. The North American Journal of Economics and Finance, 54, article 101088. https://doi.org/10.1016/j.najef.2019.101088

Abstract

© 2019 Elsevier Inc. This paper examines the dynamics of the liquidity premium in the Chinese stock market by adopting a multivariate decomposition approach to measure the individual contributions of various driving forces of the premium (such as firm size, idiosyncratic volatility, and market liquidity betas). By employing a wide range of liquidity measures, we show that liquidity premium is generally significant in the Chinese stock market. Furthermore, this premium is increasing in recent years starting from 2011; this observation is different from the United States market, in which the premium has declined over the years. Moreover, the multivariate decomposition approach highlights several asset pricing factors as the main driving forces of the premium. Based on the Amihud liquidity measure, the decomposition approach indicates that the size factor contributes 45–65% to the liquidity premium. However, the measure based on turnover suggests that idiosyncratic volatility accounts for at least 60% of the liquidity premium. In contrast, the global market liquidity beta does not significantly contribute to the premium. However, there is some evidence that the local market liquidity beta has become more significant in its impact on the premium during the period from 2011 to 2015. Our results imply that the findings on the liquidity premium in the Chinese stock market could be sensitive to the liquidity measure used and period of analysis.

DOI

10.1016/j.najef.2019.101088

Research Themes

Society and Culture

Priority Areas

Human movement and performance

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