IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v18y2010i5p509-520.html
   My bibliography  Save this article

Market liquidity risk factor and financial market anomalies: Evidence from the Chinese stock market

Author

Listed:
  • Narayan, Paresh Kumar
  • Zheng, Xinwei

Abstract

The Chinese stock market is an order-driven market and hence its characteristics are structurally different from quote-driven markets. There are no studies that consider the role of the market liquidity risk factor in determining cross-sectional stock returns in a model including financial market anomalies for order-driven markets. Our aim is to test whether financial market anomalies such as firm size, the book-to-market ratio, the turnover rate, and momentum both with and without the inclusion of the market liquidity risk factor in the case of the Chinese stock market can explain cross-sectional stock returns. The empirical framework is based on the model proposed by Avramov and Chordia (AC, 2006). Our main finding is that the AC model can capture financial market anomalies except momentum when we include the market liquidity risk factor on the Chinese stock market.

Suggested Citation

  • Narayan, Paresh Kumar & Zheng, Xinwei, 2010. "Market liquidity risk factor and financial market anomalies: Evidence from the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 18(5), pages 509-520, November.
  • Handle: RePEc:eee:pacfin:v:18:y:2010:i:5:p:509-520
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927-538X(10)00042-9
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    2. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    3. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 905-939.
    4. Eun, Cheol S. & Huang, Wei, 2007. "Asset pricing in China's domestic stock markets: Is there a logic?," Pacific-Basin Finance Journal, Elsevier, vol. 15(5), pages 452-480, November.
    5. Korajczyk, Robert A. & Sadka, Ronnie, 2008. "Pricing the commonality across alternative measures of liquidity," Journal of Financial Economics, Elsevier, vol. 87(1), pages 45-72, January.
    6. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. Philip Gharghori & Howard Chan & Robert Faff, 2007. "Are the Fama-French Factors Proxying Default Risk?," Australian Journal of Management, Australian School of Business, vol. 32(2), pages 223-249, December.
    9. Liu, Weimin, 2006. "A liquidity-augmented capital asset pricing model," Journal of Financial Economics, Elsevier, vol. 82(3), pages 631-671, December.
    10. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    11. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    12. Antoniou, Antonios & Lam, Herbert Y.T. & Paudyal, Krishna, 2007. "Profitability of momentum strategies in international markets: The role of business cycle variables and behavioural biases," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 955-972, March.
    13. Martinez, Miguel A. & Nieto, Belen & Rubio, Gonzalo & Tapia, Mikel, 2005. "Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 81-103.
    14. Doron Avramov & Tarun Chordia, 2006. "Asset Pricing Models and Financial Market Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1001-1040.
    15. Paul Brockman & Dennis Y. Chung, 2002. "Commonality in Liquidity: Evidence from an Order-Driven Market Structure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 521-539.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen, Chun-Da & Demirer, Riza & Jategaonkar, Shrikant P., 2015. "Risk and return in the Chinese stock market: Does equity return dispersion proxy risk?," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 23-37.
    2. Sharma, Susan Sunila & Narayan, Paresh Kumar & Zheng, Xinwei, 2014. "An analysis of firm and market volatility," Economic Systems, Elsevier, vol. 38(2), pages 205-220.
    3. Chen Yang, 2015. "An Empirical Study of Liquidity and Return Autocorrelations in the Chinese Stock Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 22(3), pages 261-282, September.
    4. Ho, Tsung-wu & Chang, Shu-Hwa, 2015. "The pricing of liquidity risk on the Shanghai stock market," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 112-130.
    5. repec:eee:pacfin:v:48:y:2018:i:c:p:210-223 is not listed on IDEAS
    6. Westerlund, Joakim & Narayan, Paresh Kumar & Zheng, Xinwei, 2015. "Testing for stock return predictability in a large Chinese panel," Emerging Markets Review, Elsevier, vol. 24(C), pages 81-100.
    7. Vu, Van & Chai, Daniel & Do, Viet, 2015. "Empirical tests on the liquidity-adjusted capital asset pricing model," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 73-89.
    8. repec:wsi:rpbfmp:v:20:y:2017:i:02:n:s0219091517500084 is not listed on IDEAS
    9. Kim, Soon-Ho & Kim, Dongcheol & Shin, Hyun-Soo, 2012. "Evaluating asset pricing models in the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 198-227.
    10. Benson, Karen & Faff, Robert & Smith, Tom, 2015. "Injecting liquidity into liquidity research," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 533-540.
    11. Yuan Wu, 2016. "The Asymmetric Momentum Effect in the Chinese Class A Share Market Amid Market Swings," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(1), pages 107-136, March.
    12. repec:eee:pacfin:v:43:y:2017:i:c:p:84-106 is not listed on IDEAS

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:18:y:2010:i:5:p:509-520. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.