Pricing of Liquidity Risk in Emerging Markets: Evidence from Greater China

Abstract

This paper uses the liquidity adjusted capital asset pricing model of Acharya and Pederson (2005) to examine the liquidity risk of stocks in two retail- based equity markets, China and Taiwan. We find that the proportion of liquidity risk overwhelms market risk, unlike the findings in US markets. As a pricing factor, the evidence indicates that systematic liquidity risk is more important than market risk in Taiwan. In China, cross-sectional differences in individual firm liquidity explain differences in returns.