The Research On The Relationship Between Turnover Rate And Liquidity Risk Of Chinese Stock Markets

With the rapid development of Chinese economy, the Chinese stock markets are more prosperous day by day, which attracts more and more investors into the stock markets. Meanwhile, many global investors are paying more attention to the Chinese stock markets as a result of the deepening of economic globalization and the opening up of Chinese capital market. This article discussed the relationship between turnover rate and liquidity risk of Chinese stock markets. The main issue was whether the trading activity had a great effect on the market liquidity, which would lead to liquidity risk. On the one hand, turnover rate was an important indicator for the investors to make investment decisions, while it was the result of investment activities. On the other hand, liquidity reflected the trading capacity and the effectiveness of the stock markets. The stock markets set a macro context, in which its liquidity was affected by the investment activities of micro economic agents. This would lead to liquidity risk, which could in turn have an influence on the investment return of micro economic agents. Therefore, it is meaningful to research the relationship between turnover rate and liquidity risk.This paper demonstrated that turnover rate was positively related to liquidity risk based on a simple model of market transactions. Through solving the problems of maximizing the investment value for investors, it got an approximate expression of the relationship between turnover rate and liquidity risk. Then, this paper concluded that:(1) liquidity risk would increase with the changes of expected turnover rate; (2) there was a positive correlation between realized turnover rate and liquidity risk; (3) liquidity risk was related to illiquidity at time t-1.The empirical analysis used the trading data of Shenzhen Stock Exchange, and tested the theoretical conclusions through regression analysis. The results supported the rationality and significant effectiveness of the model. Therefore, turnover rate was one of the most important factors which affected the market liquidity.However, this paper ignored other important factors, such as information asymmetry, search cost and financial restrictions of securities intermediaries, which could be further improved and perfected in the future. In short, this paper showed that, frequent trading activities didn't mean the healthy and effectiveness of the market and could bring the greater market risk.