Liquidity and asset pricing: An empirical investigation of Chinese Stock Market

For ages, liquidity is considered as an explanatory factor in the time-series variation of stock expected return. Through an empirical test with data of non-financial A-share (including 425 stocks of Shanghai Stock Market and 400 stocks of Shenzhen Stock Market) in the Chinese stock market from 2002 to 2012, the authors investigate the liquidity effect on stock expected returns, using Fama-French three-factor model and augmented Fama-French three-factor models (including liquidity factor and a momentum factor). The empirical result verified liquidity has a significant effect on stock return during the sample period. The result also show that the correlation between the prospective return of stocks and liquidity that varied with the size of companies and the level of liquidity.