What drives the liquidity premium in the Chinese stock market?

An, Jiyoun; Ho, Kin‐Yip; Zhang, Zhaoyong

doi:10.1016/j.najef.2019.101088

Cited by 12 publications

(11 citation statements)

References 40 publications

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“…Pan et al (2016) investigate the speculative trading premium and find that the abnormal turnover ratio predicts negative future stock returns in China's A-shares market. An et al (2020) also find that liquidity influences asset prices in China's A-shares market and that the liquidity premium is positive and increasing from 2011. Chordia et al (2000) first propose the concept of liquidity commonality.…”

Section: Liquidity Riskmentioning

confidence: 78%

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Risk of holding stocks with liquidity sensitive to market uncertainty: evidence from China

Sun

Shen

Qian

et al. 2020

Accounting & Finance

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We investigate the determinants of stocks' uncertainty elasticity of liquidity (UEL), whether UEL is priced, and how government officials may use national funds to reduce the UEL risk in China's A-shares market. We find that stocks with higher UEL have a smaller market capitalisation, lower stock liquidity, less investor attention, and higher market and liquidity risks. Using data from 2004 to 2018, we show that the highest UEL decile portfolio significantly outperforms the lowest UEL decile portfolio by 0.54 percent per month. Moreover, our results show that UEL provides additional explanatory power for stock returns after we control for a stock's transaction cost, firm characteristic risks, market risk and liquidity risk. As UEL is an important systematic risk, we hypothesise that government officials will take actions to reduce this risk when the market becomes more volatile. Consistent with our hypothesis, our results show that the 'national team' provides liquidity by executing trades opposite to those of other institutional investors during the 2015 stock market crisis in China.

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Section: Liquidity Riskmentioning

confidence: 78%

“…An et al . (2020) also find that liquidity influences asset prices in China’s A‐shares market and that the liquidity premium is positive and increasing from 2011.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 92%

Risk of holding stocks with liquidity sensitive to market uncertainty: evidence from China

Sun

Shen

Qian

et al. 2020

Accounting & Finance

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“…(2013), who argue that momentum profitability exists in the comparative Chinese equity market due to its prevalence in short‐term stock returns. The author used TA as a proxy for liquidity and discovered that it was statistically significant at the 1% level in both estimations, with the higher coefficient value of 0.0194 in sys‐GMM implying that the liquidity factor was more pervasive and significant in the Chinese market (An et al., 2020). Finally, the dividend yield is significantly and positively associated at a 1% level with the higher coefficient value of 1.452 in sys‐GMM, consistent with the findings (Cheung et al., 2015; Sarwar et al., 2020).…”

Section: Resultsmentioning

confidence: 99%

The relevance of earning‐to‐price and ROE predictability for explaining Shenzhen stock exchange (SZSE), returns in China: A dynamic panel data approach

Arshad

2021

J Corp Accounting Finance

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The fundamental valuation (FV) perspective has been extended to the Shenzhen Stock Exchange (SZSE) in China by focusing on the role of forecasted earning‐to‐price ratio and return on equity (ROE). Forecasting the variables is being done using a linear dynamic panel data technique. The findings of the two‐step Generalized Method of Moments (GMM) analysis indicate that the forecasted E/P ratio and ROE significantly explain a portion of the variation in the SZSE stock return and remain highly statistically significant after risk proxy variables are included. Additionally, it confirms the existence of size, momentum, liquidity, and dividend yield in the SZSE. This supports the usefulness of an FV perspective based on the unique characteristics of the Chinese equity market in explaining stock returns and their potential utility in forecasting future stock returns.

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“…The average total liquidity premium is computed as the estimated parameter for amortised liquidity measure multiplied by the median value of amortised ILLIQ R measure. A similar approach was presented by An et al (2019). The use of median instead of mean is a result of high liquidity concentration in the WSE.…”

Section: Conditional Stock Liquidity Premiummentioning

confidence: 96%

Conditional stock liquidity premium: is Warsaw stock exchange different?

Stereńczak

2021

SEF

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Purpose This paper aims to empirically indicate the factors influencing stock liquidity premium (i.e. the relationship between liquidity and stock returns) in one of the leading European emerging markets, namely, the Polish one. Design/methodology/approach Various firms’ characteristics and market states are analysed as potentially affecting liquidity premiums in the Polish stock market. Stock returns are regressed on liquidity measures and panel models are used. Liquidity premium has been estimated in various subsamples. Findings The findings vividly contradict the common sense that liquidity premium raises during the periods of stress. Liquidity premium does not increase during bear markets, as investors lengthen the investment horizon when market liquidity decreases. Liquidity premium varies with the firm’s size, book-to-market value and stock risk, but these patterns seem to vanish during a bear market. Originality/value This is one of the first empirical papers considering conditional stock liquidity premium in an emerging market. Using a unique methodological design it is presented that liquidity premium in emerging markets behaves differently than in developed markets.

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What drives the liquidity premium in the Chinese stock market?

Cited by 12 publications

References 40 publications

Risk of holding stocks with liquidity sensitive to market uncertainty: evidence from China

Risk of holding stocks with liquidity sensitive to market uncertainty: evidence from China

The relevance of earning‐to‐price and ROE predictability for explaining Shenzhen stock exchange (SZSE), returns in China: A dynamic panel data approach

Conditional stock liquidity premium: is Warsaw stock exchange different?

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