Are conditional illiquidity risks priced in China? A cross-sectional test

Zhi Su, Tongtong Lyu and Libo Yin

International Review of Financial Analysis, 2022, vol. 81, issue C

Abstract: In this study, we theoretically derive conditional illiquidity risks from the conditional liquidity-adjusted capital asset pricing model (CLCAPM) that we propose by incorporating funding illiquidity into the LCAPM, and we examine whether they are priced empirically in China's A-share market. We provide new evidence of the positive premiums of conditional illiquidity risks even after controlling for mispricing signals and sentiment. The finding suggests that conditional illiquidity risk could be an alternative channel to explain the cross-section of stock returns. Moreover, investors could obtain higher premiums as compensation for their tolerance of more highly conditional illiquidity risks during high market volatility (low market returns) periods.

Keywords: Funding illiquidity; Conditional illiquidity risk; Risk premiums; CLCAPM (search for similar items in EconPapers)
JEL-codes: G12 G14 G20 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000497

DOI: 10.1016/j.irfa.2022.102077

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