Liquidity And Stock Returns Empirical Research

Liquidity is generally described as the ability to trade large quantities quickly at low cost with little price impact. This description indicates four liquiditydimensions——trading quantity, trading speed, tading cost, and price impact. There isliquidity premium in the stock market, that is to say, for compensate liquidity risk of illiquidity stock, the stock would sell at lower price and it would have higher return than higher liquidity stock.Existing liquidity measures that were adopted in liquidity premium research literature typically focus on one dimension of liquidity, including bid-ask spread measure, the turnover measure, the trade quantity, illiquidity measure. But because of the particularity of our country security market and liquidity have four dimensions, so the application of above-mentioned measures on our country security market is limited. This paper is on the basis of the particularity of our country security market and liquidity definition and characteristic, one new liquidity measures (LDX) was constructed.The paper choose the stock that begin trading before 1998 in Shanghai A stock market as research sample ,260 stock trade from January of 1998 to this period of April of 2005 was regarded as the research object. Analysing the relevant relations among the new liquidity measure (LDX ) and turnover rate,trade quantity,illiquidity measure(ILLIQ ), experience result prove new liquidity measure (LDX ) can measure liquidity from a lot of dimensions, and could be adopted measure our country security market.The paper verified the relation between stock liquidity and return in the cross-section by new liquidity measure(LDX).Research result indicated that the relation between new liquidity measure(LDX) and return is positive, that is to say that there are negative relation between stock liquidity and return. The relation exists on different period of time and isn't infected by "January effect". But the research alsodiscover that the liquidity premium effect exists only in months when policy were switchman and doesn't exist in months when there aren't policy. Then the paper verified the function relation between stock return and new liquidity measure(LDX). The result indicated that the stock return is the concave increase function of new liquidity measure(LDX). That is to say the stock return is the concave increase function of trade cost.The paper verified the relation between stock market illiquidity and stock excess return in time series by new liquidity measure(LDX). The research result indicated that expected market illiquidity hasn't a positive and significant effect on ex ante stock excess return in our country stock market, and unexpected market illiquidity has a negative and significant effect on contemporaneous stock return. By this result, the paper verified the relation between market illiquidity and excess returns on liquidity-based portfolios. The results suggest that the effects of market illiquidity-both expected and unexpected-are stronger for lower liquidity stocks than they are for higher liquidity stock.