Research On Liquidity Based On Higher Moments And Cross-Sectional Expected Stock Return

The stock market crash in 2015 made us deeply understand that the impact of financial market risk on asset volatility is huge and direct,and the most direct and effective performance of its impact is the operational efficiency of financial markets.When the efficiency of financial markets is reduced,the liquidity of assets will decline rapidly.At this time,the liquidity of stocks also showed a significant decline;Therefore,the academic community has shown great concern about the existence of the relationship between the two.In the securities market,because financial risks are ubiquitous,the prediction of stock market returns has always been an important issue in the financial sector.At present,more and more foreign scholars are paying attention to the high-order moment factors of liquidity,such as the second-order moment of liquidity,that is,the volatility,the third-order moment of liquidity,that is,the skewness and the extreme liquidity risk.Some scholars have examined the so-called "liquidity crunch year".and it also emphasizes that the extreme form of liquidity risk is that the liquidity of assets is exhausted at the same time and the whole market assets are frozen,and the risks brought by them are unpredictable.Therefore,investors may not be concerned about liquidity risk in normal market conditions,but in the case of liquidity crisis,it may become a key issue.In the domestic literature,there are few empirical studies on how the second-order moments of liquidity and higher-order moment variables or extreme forms of liquidity risk are priced in cross-sectional expected stock returns.Most research focuses on the overall level of market liquidity,so domestic research in this area is urgently needed.This paper uses Amihud(2002)illiquidity indicators to measure the liquidity of individual stocks,based on this indicator,we first examine the relationship between the higher moments of individual stock liquidity and cross-sectional stock expected return,exploring the pricing effects of the level,volatility,skewness and kurtosis of individual stocks;Second,based on the framework of the capital asset pricing model(LCAPM)of Acharya and Pedersen(2005),we examine the relationship between the covariance of liquidity and other variables and cross-sectional expected return;Finally,we further explore whether the covariance of liquidity and other variables in the case of extreme liquidity has a certain predictive effect on the expected stock return.In addition,the empirical analysis of this paper mainly uses two methods,ranking analysis and Fama-Macbeth cross-sectional regression.Through a series of empirical studies,this paper mainly draws the following conclusions:(1)The average level of liquidity of individual stocks and the second-order moment,that is,the volatility,have a significant positive relationship with cross-sectional expected stock return.Consistent with a large number of empirical results by scholars at home and abroad,and Fama-Macbeth cross-sectional regression tests the pricing effect of the mean and volatility of individual stock liquidity.The empirical results reaffirm the positive relationship between the average level of liquidity of stocks and the volatility and expected return.In summary,the above empirical results show that:In China’s A-share market,the first-order moment and second-order moment of individual stock liquidity,that is,the mean level and volatility have significant explanatory power in cross-sectional stock return.And its explanatory power cannot be completely covered by the scale factor,the book value ratio factor,the lag phase return and the momentum factor.It is confirmed that the mean level of individual stock liquidity and the second moment,that is,the volatility can be used as a separate pricing factor;(2)The covariance of liquidity and other variables has an important influence on cross-sectional expected stock return.Under normal circumstances,there is a significant negative relationship between the covariance of individual stock liquidity and market liquidity and the expected return,and the explanatory power cannot be completely covered by other variables;In the case of extreme liquidity,the covariance and expected return of individual stock liquidity and market liquidity still maintain a significant negative relationship.At the same time,there is a significant positive relationship between the return of individual stocks and the market liquidity and the expected return.Both have independent explanatory power for the expected return.In summary,the above empirical results show that the covariance of individual stock liquidity and market liquidity has a certain ability to predict the cross-sectional expected return.And the covariance of individual stock returns and market liquidity under extreme liquidity also has an important impact on the expected return.