Research On Stock Market Liquidity And Liquidity Risk

Liquidity is an important basis on stock market. If market is short of liquidity, transaction is difficult to be completed and market does not need to exist. In classical assets pricing theory research, trading markets are assumed to have full liquidity, which mean that traders are price receiver. So liquidity and liquidity risk are always ignored. However, the reality of the stock market is not the case and market traders are often faced with liquidity risk. So liquidity and liquidity risk are intended to be studied in this article. The relations between liquidity (risk) and assets pricing, returns and liquidity constraint to investors are investigated based on Chinese stock markets. The main purpose is to give theory researchers and investors some reference.The main contents and conclusions of the paper are giving as follows:1,The relationship between micro and macro liquidity on the Chinese stock market are analysed for the first time. The empirical results show that the influences of monetary policy are not significant in spite of money supply or interest rates. But stock systematic liquidity dependents on the market returns.2,The relation between market returns and liquidity under extreme condition, time-varying dynamical illiquidity premium and the effect liquidity on stock returns fluctuation are studied.(1)The empirical findings show that it is consistent that returns and liquidity are simultaneous extreme value, but tail symmetric dependence structure is rejected. (2)There are dynamic characteristics in illiquidity premium. Illiquidity premium vary across two distinct states and this difference is significant.This findings are based on two states Markov model. (3)A simple theoretical model is established in order to investigate the relationship between stock liquidity and price volatility. Then empirical analysis is done based on China stock market. The results show that illiquidity is helpful to explaining volatility. So illiquidity is an important explanatory variable of volatility. There is positive relationship between volatility and illiquidity. But it is different from foreign empirical conclusions. GARCH effects can not be completely eliminated by the addition of illiquidity in conditional variance equation on China stock market.3,In this paper, speculative bubbles theory that distinguish from traditional interpretation is proposed for illiquidity premium phenomenon. The existence of different beliefs lead to irrational investors speculative transactions and speculative transactions often make transactions more frequently, so high liquidity will inevitably accompanied with more speculative bubbles. That would lead to stock price overvalued and expectation returns would be reduced. So illiquidity premium phenomena appear in market. Then we perfect empirical analysis based on China A-share market earnings announcement. The empirical results support our hypothesis. So the theory of speculative bubbles has been confirmed.4,The role and status of liquidity and liquidity risk explaining asset pricing anomalies are discussed. In classical assets pricing models, only market risk is considered but liquidity is ignored. Therefore, the results of empirical analysis are often not consistent with their theory.So there have been a number of asset pricing anomalies. The role of liquidity in asset pricing is made an empirical analysis based on the Chinese A-share market.The results show that:(1)There are negative correlation between illiquidity and stock size,between liquidity risk and stock size; there are positive correlation between illiquidity and b/m,between liquidity risk and b/m;so the asset pricing model considering liquidity not only can well explain illiquidity premium but also can explain"small companies effect"and"b/m effect"anomalies.(2)Liquidity risk can explain the PEAD phenomena. The returns of good news (high SUE) companies are more sensitive to market liquidity change. So its liquidity risk is greater than the bad news companies (low SUE) stocks. Therefore, the expected returns increase. The liquidity level can not explain PEAD anomaly, but liquidity costs would hinder the implementation of the arbitrage strategy. (3)The closed-end fund discount/premium correlated with liquidity and liquidity risk. The discount degree of closed-end fund increase with its relative liquidity declining and increase with its relative liquidity risk increasing.5,When liquidity-constrained investment strategy are invetegated,we maily make two major.Firstly, we relax Markowitz assumptions by adding liquidity factors to"Mean– Variance"model. This results show that there is a notable difference in portfolio choice and at the same returns level, the portfolio risk has increased when considered liquidity.Illiquidity positively correlated with market risk, negatively correlated with returns. The phenomena become especially significant in greater illiquidity.Secondly, in this paper, the price impact model is expanded. Supposing price impact with stochastic and nonlinear, we established a stochastic and nonlinear price impact model. The results show that the trader liquidation speed is obviously confined and the speed is constant under stochastic quadratic price impact function. The parameters sensitivity of optimal strategy is also analyzed in the dissertation: in early days, the greaterσandαare, the greater liquidation speed is. The liquidation position reduction is more close to linear withγ,βandθincreasing. .