China's illiquidity premium: Due to risk-taking or mispricing?

Zhi Su, Tongtong Lyu and Libo Yin

Pacific-Basin Finance Journal, 2022, vol. 76, issue C

Abstract: This study focuses on China's A-share market and investigates the existence and underlying source of the illiquidity premium. We observe a significant and positive relationship between stock illiquidity and expected returns. Moreover, relative to illiquid stocks, liquid stocks are more susceptible to overpricing during high sentiment periods and earn lower abnormal returns following high sentiment periods, thus supporting the sentiment-driven mispricing explanation. We also find evidence that the illiquidity premium fails to reflect exposure to underlying risk. Overall, China's illiquidity premium derives from mispricing instead of risk-taking.

Keywords: Illiquidity premium; Risk; Mispricing; Sentiment (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (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:pacfin:v:76:y:2022:i:c:s0927538x22001561

DOI: 10.1016/j.pacfin.2022.101861

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