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Are conditional illiquidity risks priced in China? A cross-sectional test

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  • Su, Zhi
  • Lyu, Tongtong
  • Yin, Libo

Abstract

In this study, we theoretically derive conditional illiquidity risks from the conditional liquidity-adjusted capital asset pricing model (CLCAPM) that we propose by incorporating funding illiquidity into the LCAPM, and we examine whether they are priced empirically in China's A-share market. We provide new evidence of the positive premiums of conditional illiquidity risks even after controlling for mispricing signals and sentiment. The finding suggests that conditional illiquidity risk could be an alternative channel to explain the cross-section of stock returns. Moreover, investors could obtain higher premiums as compensation for their tolerance of more highly conditional illiquidity risks during high market volatility (low market returns) periods.

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  • Su, Zhi & Lyu, Tongtong & Yin, Libo, 2022. "Are conditional illiquidity risks priced in China? A cross-sectional test," International Review of Financial Analysis, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000497
    DOI: 10.1016/j.irfa.2022.102077
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    More about this item

    Keywords

    Funding illiquidity; Conditional illiquidity risk; Risk premiums; CLCAPM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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