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

  • Narayan, Paresh Kumar
  • Zheng, Xinwei

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.

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Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 18 (2010)
Issue (Month): 5 (November)
Pages: 509-520

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Handle: RePEc:eee:pacfin:v:18:y:2010:i:5:p:509-520
Contact details of provider: Web page: http://www.elsevier.com/locate/pacfin

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  1. 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.
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  8. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April.
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  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.
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