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Risk concerns and market liquidity: A regression discontinuity design

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  • Lin, Wenlian
  • Cao, Jerry
  • Li, Yong

Abstract

Market liquidity evaporation is often accompanied by heightened risk concerns among investors. We explore a threshold-based risk management strategy underlying this phenomenon, exploiting a unique feature in China's stock market where outside investors can observe whether blockholders of listed firms engage in share pledge financing. This transparency offers investors a clear threshold—the pledge day stock price—to monitor and assess the risks associated with share pledges. Using a regression discontinuity design, we find investors widely employ this threshold-based strategy; when the threshold is breached, they become increasingly cautious, reducing their liquidity provision, leading to a decline in market liquidity.

Suggested Citation

  • Lin, Wenlian & Cao, Jerry & Li, Yong, 2025. "Risk concerns and market liquidity: A regression discontinuity design," Journal of Financial Markets, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:finmar:v:76:y:2025:i:c:s1386418125000291
    DOI: 10.1016/j.finmar.2025.100989
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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