Research On The Liquidity Measuring And Its Affecting Factors In Chinese Security Market

From the Demsetz(1968) beginning, including Amihud(1986,2000),O'hara(1987,1996,2000), researchers turn to paying attention to financial market microstructure, and abandon many traditional hypotheses . This exploring brings about coming out many new research areas, one of which is about market liquidity.The liquidity and earnings, risk (or safety) constitute three basic factors of financial market, and the most important one of them is liquidity. Liquidity is the basic factor that determines whether or not stock is market efficient, because the most important function of stock market is to supply liquidity for investors. If market is lack of liquidity, trading would not be executed immediately, and there is no necessary for market to exist. For regulators, a market that is stable,full of liquidity would improve investors confidence, which help to keep market stable. For investors, the trading cost is lower in a market that has higher liquidity than in the one that has lower liquidity. As for these reasons, Amihud and Mendelson(1990)said that liquidity is the most important factor for stock market.Because the liquidity theory origins from the United States, the study on liquidity in market-maker market is full of fruit. Market-makers supply liquidity for investors, and play a core role in quote-driven market.But what trading system it adopts in China market is order–driven trading mechanism, which is totally different from the one in maker market. So, the liquidity supplied mechanism,measuring index and effect factors are also different between the two market mechanism. In quote-driven market, market-makers supply liquidity, while limit orders supply liquidity in order-driven market. The difference between them means that the theories about them can not be substituted for each other.This thesis mainly studies how to measure liquidity and what factors that effect liquidity in order-driven market.Firstly, because liquidity is impalpable, how to measure liquidity is an argument question in academe. So, how to measure liquidity is the first question that we need to solve in our thesis. We define the liquidity in order-driven market, and analyze the liquidity index already existed, on the base of which we establish a complete and simple measuring index. This index and the one that Amihud established in 2002 have some homology, but the difference between them is also clear. And the index in our thesis is totally different from those indices that based on the microstructure theory. Our index is complex, and it generalize all-round character of liquidity such as width,tightness,elasticity, etc. By analyzing the characters of the index, we can find that the index is reliable and sensitive in measure real liquidity of Chinese stock market.Secondly, there are many factors that effect liquidity such as macro policies,performance of list corporation,trading mechanism and investor behavior, but the most direct factors could be classified two categories: one is trading mechanism and investor behavior. Trading mechanism and investor behavior both determinate the level and the volatility of liquidity, and other factors'effecting on liquidity is transmitted by those two factors. .The Trading mechanism in Chinese stock market is composed of many sub-systems, including order form,price–formed mechanism, market- stabilized mechanism. And the each sub-systems is also composed of smaller parts, such as price limit,tick size,"T+1"mechanism etc. . By empirical study, we get some conclusions. At the point of academe, if initiative orders and non-initiative orders are matched completely, liquidity is super. And if the ratio of non-initiative orders with initiative orders is in unbalance, the liquidity gets worse. In Chinese stock market, the size of non-initiative orders is bigger than the one of initiative orders, so the main reason that limits liquidity is the lack of initiative orders. To improve liquidity, we should add the scale and categories of initiative orders. For the price limit mechanism ,we find that price-limit disturb liquidity, and that it make illiquidity run"V"track when price hit raise limit, and that it make illiquidity run inverse"V"when stock price drop at dropping limit, and that the liquidity is improved clearly on the second day. So we should broaden the price limit to increase liquidity. We also find that"T+1"mechanism weaken liquidity, because it add time cost and execution cost for investor, and that tick size has positive effect on illiquidity. So, for increase liquidity, we should broaden price limit, and turn to"T+0"mechanism. We should execute different tick size in the light of different security price, which means the lower is the price, the smaller tick size. Investor behavior is other important factor that effect liquidity.Investors are supposed having absolute sense,homogeneous information and same expectation in trading financial theory, but the researches of behavior finance show that investor sense is limit, and that there are too many noise traders in real world: They are over confident or over pessimistic, and they are easy to be manipulated by falsehood information.We establish theoretic model that is based on expected theory to analyze how investor behavior affect liquidity. Main findings are as follows. First, there exists negative effects between information contains that unformed traders have and market liquidity. Secondly, the number of participators has positive effect on market liquidity. Third, the relationship between the proportion of noise traders and market liquidity is depend on the confident degree that noise trader have on their information. If noise traders are over confident on their wrong information, the proportion that noise traders occupy has positive effect on market liquidity, or else has negative effect. By empirical study, we verify the relationship between asymmetric distribution of information and liquidity. Further more, we test the effects of investor structure on liquidity. Although the trading volume of individual investors take great percentage of whole trading volume, their unbalance of sell-to-buy is minor. While Individual investors buy or sell with high frequency, they supply the liquidity for other investors. At same time, institution investors such as mutual-fund company have information advantage, and their behavior of sell-to-buy is almost at same direction, and the can hidden their private information in the market with sufficient liquidity. So individual investors can be regarded as noise traders that supply liquidity for other investor, while fund companies have information advantage, and fund company behavior is an indicator for other investor.