Can Turnover Estimate China Stock Market Liquidity?

Liquidity is very important for stock market.In China,turnover index is always used to evaluate liquidity and stock turnover in China stock market is always relatively high.However,liquidity is a complex concept,with different aspects like width and depth.And a liquid stock market needs comprehensive evaluation of liquidity level.But there are different opinions about liquidity level of China stock market in both academic and practice fields.This paper uses ANOVA and regression analysis to compare liquidity of China and US stock market through 10-year historical data from July 2005 to June 2015 and finds out that,after control of price,volume,vitality and size,liquidity of China stock market is indeed better than that of US stock market from both perspectives of market depth and width.Also,after control of relative factors,this paper uses other liquidity indices as dependent variable to build regression against turnover and finds out that different liquidity indices do not have consistent relationship with turnover,indicating different explanation of liquidity between turnover and other indices,which means turnover has low interpretation efficiency of liquidity.Meanwhile,this paper includes liquidity indices in Fama-French Five Factor Model to analyze explanation of stock return by different liquidity indices and finds out that,Martin Index,adjusted by price and shares outstanding,and Execution Cost can explain stock return better,making them more suitable liquidity depth and width indicators for China stock market.