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Price delay premium and liquidity risk

Author

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  • Lin, Ji-Chai
  • Singh, Ajai K.
  • Sun, Ping-Wen (Steven)
  • Yu, Wen

Abstract

Hou and Moskowitz (2005) document that common stocks with more price delay in reflecting information yield higher returns and that the delay premium cannot be explained by the CAPM, Fama-French three-factor model, or Carhart's four-factor model. It cannot be explained by conventional liquidity measures either. They contend that the premium is attributable to inadequate risk sharing arising from lack of investor recognition, as Merton (1987) suggests. Using a parsimonious and powerful asset pricing model developed by Liu (2006), we re-examine the issue and find that firms with greater price delay have more difficulty attracting traders (higher incidents of non-trading) and their investors face higher liquidity risk, which accounts for their anomalous returns. Our findings suggest that the price delay premium is due to systematic liquidity risk, not inadequate risk sharing.

Suggested Citation

  • Lin, Ji-Chai & Singh, Ajai K. & Sun, Ping-Wen (Steven) & Yu, Wen, 2014. "Price delay premium and liquidity risk," Journal of Financial Markets, Elsevier, vol. 17(C), pages 150-173.
    • Handle: RePEc:eee:finmar:v:17:y:2014:i:c:p:150-173
    DOI: 10.1016/j.finmar.2012.12.001
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    Cited by:

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    3. Li, Jinxian & Gong, Yujing & Ho, Kung-Cheng & Zhang, Cheng, 2023. "Trust and price efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    4. Qian, Meifen & Sun, Ping-Wen & Yu, Bin, 2018. "Top managerial power and stock price efficiency: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 47(C), pages 20-38.
    5. Qian, Meifen & Sun, Ping-Wen & Yu, Bin, 2017. "High turnover with high price delay? Dissecting the puzzling phenomenon for China's A-shares," Finance Research Letters, Elsevier, vol. 22(C), pages 105-113.
    6. Priyanka Naik & Y. V. Reddy, 2021. "Stock Market Liquidity: A Literature Review," SAGE Open, , vol. 11(1), pages 21582440209, January.
    7. Ho, Kung-Cheng & Lee, Shih-Cheng & Sun, Ping-Wen, 2022. "Disclosure quality, price efficiency, and expected returns," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    8. Xia, Chuanxin & Yang, Nien-Tzu & Lin, Chaonan & Ko, Kuan-Cheng, 2021. "Multi-market trading, price delay, and return predictability," Finance Research Letters, Elsevier, vol. 40(C).
    9. Chunying Wu & Xiong Xiong & Ya Gao, 2022. "Does ESG Certification Improve Price Efficiency in the Chinese Stock Market?," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 29(1), pages 97-122, March.

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    More about this item

    Keywords

    Liquidity risk; Price delay premium; Investor recognition;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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