Liquidity provisions by individual investor trading prior to dividend announcements: Evidence from Taiwan

This paper investigates the role of liquidity provisions played by individual investors prior to dividend announcements in Taiwan. We first document a positive relationship between aggregate individual trading before dividend announcements and abnormal stock returns in the one month after the events. We find that this positive relationship varies with liquidity. We then decompose the abnormal returns following the event into information and liquidity provision components. The information component is not significant at all, but the liquidity component is positively significant, which shows that it is individual investors’ provisions of liquidity to institutional investors prior to dividend announcements that drives the positive relationship between pre-event individual trading and post-event returns.     

What drives the liquidity premium in the Chinese stock market?

This paper examines the dynamics of the liquidity premium in the Chinese stock market by adopting a multivariate decomposition approach to measure the individual contributions of various driving forces of the premium (such as firm size, idiosyncratic volatility, and market liquidity betas). By employing a wide range of liquidity measures, we show that liquidity premium is generally significant in the Chinese stock market. Furthermore, this premium is increasing in recent years starting from 2011; this observation is different from the United States market, in which the premium has declined over the years. Moreover, the multivariate decomposition approach highlights several asset pricing factors as the main driving forces of the premium. Based on the Amihud liquidity measure, the decomposition approach indicates that the size factor contributes 45–65% to the liquidity premium. However, the measure based on turnover suggests that idiosyncratic volatility accounts for at least 60% of the liquidity premium. In contrast, the global market liquidity beta does not significantly contribute to the premium. However, there is some evidence that the local market liquidity beta has become more significant in its impact on the premium during the period from 2011 to 2015. Our results imply that the findings on the liquidity premium in the Chinese stock market could be sensitive to the liquidity measure used and period of analysis.     

Liquidity and asset pricing: Evidence from the Chinese stock markets

We introduce a novel two-factor model, incorporating market and liquidity factors, which outperforms the CAPM and Fama–French factor models when applied to stock market returns in Shanghai and Shenzhen over 2000–2019. We compute the liquidity factor as the return on a liquidity-mimicking portfolio, which we construct simultaneously using two measures of liquidity (one of them capturing liquidity’s trading-quantity dimension, and the other associated with its price-impact dimension). Unlike the CAPM and Fama–French factor models, the advocated two-factor model is able to account for numerous return anomalies, such as size, book-to-market ratio, earnings-to-price ratio, cash-flow-to-price ratio, return-on-equity, and volatility. The model’s performance is similar when applied separately to the Shanghai and Shenzhen stock markets. Furthermore, it fares similarly over the 1994–2004 and 2005–2019 sub-periods. This result is somewhat surprising, because liquidity seems likely to have been substantially lower over 1994–2004, as the Chinese markets were noticeably smaller, and the critical market reform aimed at eliminating non-tradable shares by the end of 2006 did not occur until 2005.     

Investor heterogeneity and commonality in stock return and liquidity

This paper examines how the trading activities of different investor types are related to common return and liquidity movements. Using a unique dataset, we decompose the daily return and liquidity of individual stocks into price impact components attributable to trades of institutional investors and retail investors. We then investigate the variation of each component relative to market-wide return and liquidity. We show that institutional trades contribute more than retail trades to liquidity commonality. However, retail trades contribute more strongly to return co-movement. The incremental contribution of retail trades to the co-variability of stock returns is more pronounced for firms with high information asymmetry.     

The role of an illiquidity risk factor in asset pricing: Empirical evidence from the Spanish stock market

The main purpose of this study is to construct an illiquidity risk factor for the Spanish stock market over the 1994–2002 period. Because of the absence of consensus in empirical research about the most appropriate liquidity measure, we applied the Amihud [Amihud, Y. (2002). Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets 5, 31–56] illiquidity ratio that shows the price response associated with one euro of trading volume. Moreover, we generated an illiquidity factor using the Fama and French [Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3–56] orthogonal approach and analyzed whether it enters the stochastic discount factor as an additional state variable. We conclude that systematic illiquidity should be a key ingredient of asset pricing.     

流动性的股票特征——基于中国证券市场的经验数据分析

在对流动性内涵认识的基础上,本文提出股票流动性的本质是股票与现金之间相互转化的能力,满足的是投资者正常的交易需求。从流动性的公司规模和成交金额特征、流动性与股价的关系和流动性水平的稳定性三个方面理论探讨和实证检验了流动性的股票特征,研究结果表明：（1）公司规模一定,可实现的成交金额越多,流动性越好;成交金额一定,公司规模越大,流动性越好;（2）股票的价格与股票流动性之间具有显著的正相关关系;（3）流动性水平在一定时期内具有稳定性。     

Disclosure quality,price efficiency,and expected returns

Using a composite disclosure quality measure, we examine the effect of disclosure quality on price delay and the effect of price delay determined by disclosure quality on expected returns in the Taiwan stock market. We find that higher disclosure quality can reduce stock price delay through more investor attention and higher stock liquidity after we control for accounting quality variables and consider the endogeneity issue. Furthermore, we show that disclosure quality reduces expected stock returns through the price efficiency channel associated with both investor attention and stock liquidity. Our results indicate that increasing a firm’s standardized information rating by one standard deviation can reduce its expected stock return by 0.63% annually. Taken together, our evidence suggests that regulatory activities enforced to improve public firms’ disclosure quality in the Taiwan stock market can make the stock market more efficient and therefore lower investors’ required return for stocks.     

流动性溢价理论研究述评

资产流动性是否影响资产的价格一直是资本市场理论研究的热点问题,也是投资者决策的重要理论依据之一。本文系统回顾了国内外有关流动性溢价理论的研究现状,分析了我国股市流动性溢价的影响因素,并指出了我国在流动性溢价理论研究方面所存在的问题以及未来的研究方向。     

Liquidity skewness premium

Risk-averse investors may dislike decrease of liquidity rather than increase of liquidity, and thus there can be asymmetric preference in variation of liquidity. In addition, investors are likely to avoid extreme illiquidity. This paper examines whether the skewness of an individual firm’s liquidity capturing asymmetric distribution of liquidity and extreme illiquidity is priced in the US stock market. Using the skewness of the daily price impact, we find that it is positively priced, and this positive relation is significant up to eight months after controlling for other effects. Moreover, we find our results remain significant with the skewness of alternative liquidity measures, i.e., dollar-volume, and turnover.     

Resiliency of the limit order book

This study contributes to our understanding of the liquidity replenishment process in limit order book markets. A measure of resiliency is proposed and quantified for different liquidity shocks through the impulse response functions generated from a high frequency vector autoregression. The model reveals a rich set of liquidity dynamics. Liquidity shocks were found to have immediate detrimental effects on other dimensions of liquidity but the replenishment process generally occurs quickly, indicating limit order books are resilient. Cross-sectionally, resiliency is found to be consistently high across all large stocks, consistent with competition for liquidity provision coming from computerized algorithms. For other stocks, greater variation in resiliency is observed, indicating more selective participation by these liquidity providers.     

基于流动性调整CAViaR模型的风险度量方法

本文提出了流动性风险度量的一个新的方法,流动性调整的CAViaR模型。该模型能够直接反映资产流动性的变动对未来风险的影响,并在此基础上计算资产未来经过流动性调整的风险VaR,从而使投资者能够更好地管理风险,尤其是流动性风险。实证研究表明,该模型能够较好地刻画中国股市流动性风险的动态变化特征;并且发现股票流动性的大幅下降通常导致未来风险明显加大,且正向流动性下降所带来的风险往往较负向流动性要更大,因此更值得投资者关注。     

Commonality in liquidity among Middle East and North Africa emerging stock markets: Does it really matter?

This study investigates commonality in daily liquidity among 11 emerging stock markets from the Middle East and North Africa from January 2005 to June 2017. First, we test long memory in liquidity in these markets. Second, we select a number of factors eligible to affect liquidity commonality among local, regional and global factors. We find that regional and US factors do not explain liquidity variations in all the markets that exhibit low sensitivity to external factors. Our results are robust to the use of alternative proxies. The analysis in sub-periods confirms our results showing that most markets are not very sensitive to fluctuations and external shocks of liquidity. For international investors, stock markets in the Middle East and North Africa present an opportunity for further diversification, as these markets exhibit weak correlations between them and with the global market with regard to liquidity.     

Liquidity,earnings management,and stock expected returns

This paper examines the relationships among liquidity, earnings management, and stock expected returns by using a sample of Chinese listed firms to investigate 22,022 firm–year observations from 1998 to 2018. Our study reveals that an increase in stock liquidity is associated with a decrease in the degree of earnings management. This result is robust to the use of alternative measures when endogeneity concerns are controlled for. Moreover, the findings indicate that the stock liquidity component of earnings management is positively associated with future stock returns in Chinese firms. Our results reveal that the stock liquidity component of short-termism in managerial decisions plays a critical role in determining future stock returns.     

股票日内流动性度量及其风险调整--基于上海股票市场高频数据的实证研究

流动性是股票市场的重要属性,但对流动性进行准确的定义和度量却是一件困难的事情。本文给出了股票流动性度量的三个指标,并对这些指标进行了风险调整。最后利用风险调整后的指标对上海股票市场的样本股票进行了截面相关分析,得出风险调整后的流动性指标逻辑关系更加紧密的结论。     

成交量、价格波动与流动性统一度量

流动性是股票市场的重要属性,但对流动性进行准确的定义和度量却是一件困难的事情。本文认为股票市场流动性具有多重属性,即在横向上具有层次性,在纵向上具有期限性,在比较上具有相对性。并在此基础上构建了一个股票市场流动性的统一度量指标。     

The impact of ADR activity on stock market liquidity: Evidence from Latin America

This paper examines the impact of ADR activity on liquidity of four major Latin American stock markets. We construct a measure of ADR activity in U.S. markets for a sample of ADRs trading during January 2003–December 2010, which is subsequent to the financial liberalization episodes and currency crises that shocked emerging markets in the 1990s. The sample lists 164 depositary receipt programs (Levels I, II, and III): 16 from Argentina, 81 from Brazil, 19 from Chile, and 48 from Mexico. Using System GMM methods to handle the potential effects from stock market development on economic growth and ADR issuance, we find that higher ADR turnover in U.S. markets has positive effects on domestic market turnover, particularly for issuance of exchange-listed (Levels II and III) ADRs. This positive relationship is not a statistical artifact created by the global financial crisis of 2008.     

Do voluntary disclosures of bad news improve liquidity?

Can managers improve market liquidity and lower the cost of capital by providing voluntary earnings guidance? This study examines the impact of profit warnings on market liquidity and finds that voluntary disclosure of bad news actually improves market liquidity. By conducting an empirical study over the period 1995–2010 on NYSE, NASDAQ and AMEX listed firms, we find that firms that issue profit warnings show enhanced market liquidity during the post-announcement period. We show that profit warnings reduce information asymmetry and lower bid-ask spreads and increase trading volumes. These results are invariant to daily (short run) and monthly (long run) data after controlling for firm specific attributes. The results have major corporate policy implications. By voluntarily disclosing negative earnings guidance by managers, firms will experience significant improvement in market liquidity, thereby lowering the cost of capital. Our results are even more profound for firms that release bad news with extremely negative stock market impact. In other words, voluntary disclosure of bad news is good for market liquidity.     

中国股市日内流动性效应分析——基于高频数据的流动性度量、特征及其影响因素

本文归纳了流动性刻画维度和度量指标,选取不同规模和价位股票的高频数据作样本,吸收Amivest流动性比率计算原理,设定价格对交易量变动的敏感性为流动性度量指标,分析股票日内交易特征和流动性影响因素。结果发现：日内模式价格变动呈仰卧“F”形,交易量呈仰卧“E”形,而非传统的“L”或“U”型;日内交易模式、股票规模和股票价位均影响着股票流动性;日内模式异动时间内,股票流动性差;大规模股票流动性强;高价股流动性差。     

On the predictability of the distribution of excess returns in currency markets

This paper investigates the predictability of foreign exchange (FX) volatility and liquidity risk factors on returns to the carry trade, an investment strategy that borrows in currencies with low interest rates and invests in currencies with high interest rates. Previous studies have suggested that this predictability could have been spuriously accounted for due to the persistence of the predictors. The analysis uses a predictive quantile regression model developed by Lee (2016) that allows for persistent predictors. We find that predictability changes remarkably across the entire distribution of currency excess returns. Predictability weakens substantially in the left tail once persistence is accounted for, implying a moderate negative predictive relation between FX volatility risk and carry trade returns. By contrast, it becomes stronger in the right tail. Furthermore, we provide evidence that FX volatility risk still dominates liquidity risk after controlling for persistence. These findings suggest that the persistence of the predictors needs to be taken into account when one measures predictability in currency markets. Finally, out-of-sample forecast performance is also presented.     

Retail investors’ trading and stock market liquidity

The paper investigates the relation between retail investors’ participation in trading and aggregate stock market liquidity. The findings show a positive and significant relation between retail investors’ trading and stock market liquidity. Examination of the determinants of retail investors’ trading reveals that, on average, retail investors with more diversified trading activity tend to trade when liquidity is higher, the frequency of their arrival to the market is not affected by the level of liquidity, and retail investors are willing to trade at a lower liquidity level as sellers than as buyers. Moreover, retail investors’ trading does not create price noise at the aggregate market level. Overall, the evidence suggests that retail investors contribute to market quality.