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Compensation for illiquidity in China: Evidence from an alternative measure

Yiming Zhang and Guanying Wang

The North American Journal of Economics and Finance, 2020, vol. 53, issue C

Abstract: This paper shows that liquidity is an important source of priced risk in China. Using A-share stocks in Shanghai and Shenzhen Exchange over the period 2007–2017, we examine the influence of liquidity on stock returns. A new liquidity measure that captures multiple dimensions of liquidity is proposed. Fama-Macbeth cross-sectional regression shows that the expected return is negatively correlated with liquidity. Based on Fama and French (1993), we propose a five-factor pricing model by incorporating reversal factor and liquidity factor. Time-series regressions show that the liquidity factor makes significantly marginal contributions to explaining excess stock returns. The liquidity factor based on the proposed measure works better than alternative liquidity measures such as turnover, Amihud illiquidity measure and the measure in Liu (2006).

Keywords: Liquidity risk; Liquidity measure; Asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.najef.2020.101187

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