An Empirical Study of Liquidity Premium Based on Multiple Models

Whether the degree of stock liquidity affects stock price is a hot issue of capital market theory. This paper studies the relationship between liquidity and expected return in A share market of China. According to the stock market liquidity premium theory, we analyze the factors that affect the liquidity of the stock market and then select turnover rate and Amivest liquidity ratio to measure stock liquidity. Firstly, we establish a multiple regression model as the basic model to analyze the relationship between liquidity and expected return. It can be concluded that there is a positive correlation between turnover rate and expected return, which is contrary to the liquidity premium theory. On the other hand, the Amivest liquidity ratio has positive correlation with expected return, which is consistent with the liquidity premium theory. Furthermore, to compensate for defects of a multiple regression model, we develop Panel Data model as the improved model and find that the liquidity premium exists in China A share market because turnover rate and Amivest liquidity ratio are significantly negative correlation with expected return. Finally, we test whether the negative correlation of the stock liquidity and the stock return hold when the object is stock portfolio. The result also satisfies the liquidity premium theory.