An Empirical Study of the Liquidity Premium in Taiwan Equity Market –The Case of Financial Industries
Date Issued
2010
Date
2010
Author(s)
Lin, Jun-Cheng
Abstract
In security market, liquidity is not only important to the measurement of asset return and the evaluation of market mechanism execution, but also to the key factor of return. It is worth exploring if investors, facing information asymmetry, can obtain effective information to decrease risk by observing the relationship between liquidity and stock return. Especially after subprime crisis and financial tsunami, it is obvious that the volatility of liquidity faced by financial industry is far greater than that of other industries.
This thesis is to study financial sector in Taiwan equity market through Fama-MacBeth (1973) cross-sectional regression analysis, using turnover as liquidity indicator. By using Amihud（2002）method, liquidity is divided into two parts: expected and unexpected. Then market risk, firm size and b/m ratio in the three-factor model of Fama and French （1992、1993） are taken into account. The percentage of shares held by foreign investors is the variable of explaination of stock return. Then this study verifies if there is any liquidity premium or any factor influencing cross-sectional stock return for financial sector in Taiwan equity market.
The results are: (1) the relationship between beta and return is extremely small and negative, an outcome resulted from the special asset structure in financial sector.; (2) The company size is important in financial sector; (3) there is no evidence supporting January effect, but Chinese New Year effect exists; and (4) from the perspective of expected liquidity, liquidity premium does not exist, but it is found that, by analyzing investors’ response to the change of unexpected liquidity, liquidity premium indeed exists in financial sector, only with different distribution channel.
Subjects
stock return
liquidity premium
Fama-French three factor model
cross-sectional regression analysis
size effect
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