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Liquidity and asset pricing: Evidence from the Hong Kong stock market
Keith S.K. Lam , Lewis H.K. Tam
Department of Finance and Business Economics, Faculty of Business Administration, University of Macau, Av. Padre Tomas Pereira, S.J. Taipa, Macao, China
a r t i c l e
i n f o
Article history:
Received 10 June 2010
Accepted 17 January 2011
Available online 22 January 2011
JEL classication:
G12
G15
Keywords:
Liquidity
Asset pricing
Hong Kong stock market
Factor model
Fama French three factors
Higher moment
Momentum
a b s t r a c t
This study investigates the role of liquidity in pricing stock returns in the Hong Kong stock market.
Our results show that liquidity is an important factor for pricing returns in Hong Kong after taking
well-documented asset pricing factors into consideration. The results are robust to adding portfolio
residuals and higher moment factor in the factor models. The results are also robust to seasonality,
and conditional-market tests. We also compare alternative factor models and nd that the liquidity
four-factor model (market excess return, size, book-to-market ratio, and liquidity) is the best model to
explain stock returns in the Hong Kong stock market, while the momentum factor is not found to be
priced.
2011 Elsevier B.V. All rights reserved.
1. Introduction
Investors face liquidity risk when they transfer ownership of
their securities. Therefore, investors consider liquidity to be an
important factor when making their investment decisions. Amihud
and Mendelson (1986) nd a positive return-illiquidity relation.
Since that study, many other researchers continue to investigate
the return-illiquidity (liquidity) relation, but evidence over the
past two decades is generally inconsistent and mixed.1
Amihud (2002) shows that there is a signicant relation between liquidity and expected stock returns. He nds a negative return-liquidity relation even in the presence of size, beta, and
momentum. The use of time-series models is important, because
it allows for an investigation of whether mimicking portfolios for
risk factors captures shared variation in stock returns and identies whether the model is well-specied.
Corresponding author. Tel.: +853 8397 4167; fax: +853 2883 8320.
E-mail addresses: keithlam@umac.mo (K.S.K. Lam), lewistam@umac.mo (L.H.K.
Tam).
1
Some studies nd evidence supporting the liquidity premium theory (e.g.,
Amihud and Mendelson, 1986; Datar et al., 1998; Amihud, 2002; Chan and Faff, 2005),
while other studies nd inconsistent results (e.g., Fama and French, 1992; Brennan
and Subrahmanyam, 1996; Eleswarapu and Reinganum, 1993). At market level,
Gibson and Mougeot (2004) document a negative relation between return and
liquidity, consistent with the liquidity premium theory.
0378-4266/$ - see front matter 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.jbankn.2011.01.015
2
Lagoarde-Segot (2009) documents a wide divergence in liquidity, informational
efciency, market volatility and transaction costs across emerging markets. The paper
relates these time-varying microstructure features to nancial reforms in emerging
markets but it does not examine the relation between return and liquidity.
2218
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
end of 2008, can help us understand the impact of liquidity on asset pricing in emerging markets because the Hong Kong market is
known to be one of the most volatile stock markets in the world
and it is also well known to be dominated by small rms.3 Thus,
Hong Kong is an ideal out-of-sample testing ground for the returnliquidity relation because liquidity (illiquidity) should affect expected returns of many listed rms there.
In this paper, we adopt a time-series regression approach to
study the return-liquidity relation in Hong Kong. Previous studies do not adequately address the relations among liquidity
and other important asset pricing factors in the Hong Kong
and Asian stock markets. We hope that by studying a highly volatile market such as Hong Kong, we can nd better and more robust results on the return-liquidity (illiquidity) relation, which
helps to shed light on this issue in the literature. We employ
nine widely used liquidity (illiquidity) proxies in our study. We
adjust stock returns by the three-moment CAPM, the Fama
French three-factor model, and the augmented FamaFrench
three-factor models. Thus, we address the importance of liquidity
together with other known, important time-series determinants
of stock returns, such as beta, size, book-to-market ratio, and
momentum.
Our results show that liquidity is an important factor pricing
returns in Hong Kong after taking into consideration welldocumented asset pricing factors. In particular, illiquid stocks
have positive loadings while liquid stocks have negative loadings
on the liquidity factor. We check the robustness on liquidity by
investigating portfolio residuals and coskewness (higher moment) for possible missing factors, and by performing seasonality
and conditional-market tests. We also perform multivariate
regressions on all related factors and nd that the best model
is a liquidity four-factor model that includes excess market return, and factors for size, book-to-market ratio, and liquidity.
But unlike ndings for the US market, the momentum factor
is not an important risk factor for the Hong Kong stock
market.
The rest of this paper is organized as follows. Section 2 reviews
and summarizes the literature on the return-illiquidity (liquidity)
relation. Section 3 describes the data and methodologies. Section
4 presents and analyses the empirical results. Section 5 concludes.
2. Literature review
Amihud and Mendelson (1986) conduct a pioneering study to
investigate the role of illiquidity (liquidity) in asset pricing using
the bid-ask spread as a proxy for illiquidity. They document a positive relation between expected return and illiquidity. Eleswarapu
and Reinganum (1993) re-examine Amihud and Mendelsons
study using an updated period and nd that the positive returnilliquidity relation is mainly limited to January. Brennan and
Subrahmanyam (1996) examine the liquidity premium and nd
a positive return-illiquidity relation even after taking price, size,
and book-to-market factors (i.e., the Fama and French (1993) risk
factors) into account. Their results generally support Amihud and
Mendelsons ndings, but refute those of Elsewarapu and
Reinganum.
Peterson and Fialkowski (1994) and Brennan and Subrahmanyam
(1996) raise concerns about the bid-ask spread being a poor proxy
for liquidity. This leads to the use of alternative measures of liquidity, such as trading volume (Brennan et al., 1998), turnover ratio
(Datar et al., 1998; Chan and Faff, 2005), standard deviations of
3
We discuss and compare the volatility in the Hong Kong and US markets under
Section 4 (Test Results).
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
1988 and the one-month Hong Kong Interbank Offer Rate (HIBOR)
from July 1988 to December 2004.5,6
3.2. Methodologies
The motivation for conducting a time-series test is to examine
whether the asset pricing model, which includes factors for size,
book-to-market, and liquidity, can explain most of the time-series
variations in stock returns. If liquidity is priced, the time-series
intercept will be jointly equal to zero after controlling for the
liquidity factor. Following Nguyen et al. (2007), Gu and Huang
(2010), and Hwang et al. (2010), we use the test developed by
Gibbons, Ross, and Shanken (GRS, 1989) to check whether the
intercepts are jointly equal to zero.7
We construct 25 portfolios for each year using Hong Kong stock
data. We form three sets of portfolios based on (1) size and one of
the liquidity proxies, (2) book-to-market ratio (BM) and one of the
liquidity proxies, and (3) one of the liquidity proxies only. We use
nine liquidity proxies in this study and they are used only once
each time when forming the portfolios. See Appendix A for detailed
descriptions of how the liquidity proxies are constructed. To form
the 25 size-liquidity portfolios, at the end of June every year, we
rank the stock data yearly by market capitalization and divide
the sample into ve equal-size portfolios. Independently, we calculate the annual respective liquidity proxy for each stock in the sample and assign each stock to ve liquidity portfolios. Twenty-ve
portfolios are then formed by an intersection between the size
groups and liquidity groups. After forming portfolios using the size
and liquidity proxies, we repeat the portfolio-formation procedure
using the book-to-market ratio and liquidity proxies. To form the
25 liquidity portfolios, at the end of June every year, we calculate
the annual respective liquidity proxy for each stock in the sample
and assign the stock to one of the 25 equal portfolios according to
its rank of liquidity. After forming the three sets of portfolios, we
compute the portfolios equally-weighted monthly returns. The excess portfolio return is the portfolio return minus the risk-free rate
from. We rebalance the portfolios at the end of June every year
from 1981 to 2003. Following Keene and Peterson (2007) and
Nguyen et al. (2007), we use turnover ratio as our main proxy for
liquidity and report our results given by the stock portfolios and
liquidity factors formed by turnover ratio. We will discuss the
5
We use two different return rates because the HIBOR is not available from PACAP
before July 1988. Owing to data unavailability, Chui and Wei (1998) and Daniel et al.
(2001), in their studies of cross-section of stock returns in ve Pacic-Basin stock
markets and in Japan, respectively, use more than one return rate as the risk-free rate
during their sample periods. It is not uncommon to encounter difculties in nding
continuous risk-free rates in Asian markets that are comparable to the US Treasury
Bill rates.
6
In a robustness check, we re-run the model by using prime rate only for the whole
sample period. The results are essentially unchanged compared to those reported in
the paper. Although the prime rate is generally higher than the HIBOR and this results
in a lower stock return premium, the effect is offset by a corresponding decrease in
the stock market premium. The overall effect is that the regression intercepts are only
a few basis points lower and the coefcients of the liquidity factors are also
essentially unchanged.
7
Theoretically, if a particular asset pricing model captures all the factors that affect
stock returns, the intercepts of the 25 time-series portfolio return regressions should
be jointly equal to zero. Previous studies use a variety of tests to determine whether
the intercepts of time-series portfolio return regressions are all zero. Examining the
CAPM, Black et al. (1972) report only univariate t-statistics of each equation but do
not examine the joint signicance of those univariate tests. Gibbons et al. (1989) nd
that while standard tests such as Wald, likelihood ratio, and Lagrange multiplier tests
all are asymptotically distributed as chi-square with N (the number of portfolios)
degrees of freedom as the number of period, T, approaches innity, they produce
biased statistics as N is close to T. They provide an F-test that has a tractable small
sample property. Essentially, the test statistics compare (1) the Sharpe ratio of the ex
post optimal portfolio generated by market proxy plus all the 25 stock portfolios with
(2) the Sharpe ratio of the market proxy alone. Gibbons et al. then extend their tests to
multi-factor models.
2219
LIQ1
2220
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
and WML) follows those of the Fama and French (1993) and Lher
et al. (2004). See Appendix B for the details of the formation of those
non-liquidity factors.
Our motivation for conducting a time-series test is to examine
whether or not liquidity has effect on expected stock returns.
Our null hypothesis is that if liquidity is not priced in the Hong
Kong stock market, factor models without liquidity factors (i.e.
FamaFrench three-factor model, or four-factor model) should
capture all the time-series variation in portfolio returns and the
intercepts in these time-series regressions should be jointly equal
to zero. We use the GRS F-test to check whether the intercepts
are jointly equal to zero. The alternative hypothesis is that if
liquidity is priced, the intercepts from these regressions without
liquidity factors will be positive for illiquid stocks and negative
for liquid stocks and they should be jointly different from zero.
But such difference will be reduced after controlling for the
liquidity factor in these time-series regressions. By testing these
hypotheses, we are able to search for a suitable asset pricing model
for the Hong Kong stock market.
Finally, we perform several robustness tests on the best model
we found. First, we check whether major factors are left out of
the model by including the residual variance and higher moment
(coskewness) in the model. We then examine whether the results
are affected by seasonality (such as January effect), market conditions, and the unication of four stock exchanges into one in 1986.
Finally, we investigate whether the model is robust to alternative
ways to form the liquidity factors.
Table 1
Descriptive statistics of size-liquidity sorted and BM-liquidity-sorted portfolios July
1981June 2004. At the end of July of each year, all Hong Kong-listed rms in PACAP
are sorted according to their market capitalization (size), book-to-market ratio of
equity (BM) and stock turnover ratio (liquidity). Firms are then ranked into quintiles
independently by size and liquidity, or BM and liquidity. Twenty-ve two-way sorted
portfolios are then formed by the intersection of the size-quintile and liquidityquintile portfolios (Panel A) or the BM-quintile and liquidity-quintile portfolios (Panel
B). Average size, BM and liquidity of component rms are calculated for each of the 25
two-way sorted portfolios. Each number reported on the table is the yearly timeseries average values of size, BM or liquidity of one of the 25 two-way sorted
portfolios. Panel C reports the annual time-series average numbers of rms in the 25
two-way sorted portfolios.
Size
Avg. of size
Avg. of book-to-market
Avg. of liquidity
114,391.64
114,283.29
116,548.72
115,382.65
121,531.60
1.99176
2.03040
2.62391
2.23654
2.21641
0.5527
1.5966
3.0897
5.9012
15.3443
1
2
3
4
5
264,666.22
272,705.69
272,679.78
268,699.81
273,926.34
1.81262
1.75781
1.44158
1.68771
2.51235
0.5484
1.6267
3.0878
5.7456
15.6152
1
2
3
4
5
542,260.78
553,114.52
542,934.61
528,977.52
535,628.06
1.94099
1.67627
1.62080
1.55792
1.74428
0.5289
1.6228
3.1040
5.8655
17.3872
1
2
3
4
5
1,246,127.72
1,230,993.40
1,233,593.27
1,224,016.63
1,190,405.07
1.65387
1.65076
1.48708
1.42894
1.45900
0.5600
1.5894
3.0691
5.8389
15.7223
1
2
3
4
5
9,206,357.98
14,526,833.59
20,832,067.16
10,705,828.04
5,590,069.40
0.96726
1.02612
1.08745
1.33815
1.47945
0.5784
1.6301
3.1179
5.5453
15.2641
Panel B
1
1
2
3
4
5
4,836,294.65
10,626,148.85
11,125,136.66
4,232,327.20
1,207,087.02
0.34564
0.33641
0.32354
0.30436
0.33278
0.6099
1.5959
3.1462
5.8562
15.1849
4. Test results
4.1. Descriptive statistics and correlations
Appendix C displays time-series market volatilities for the
Hong Kong and the US stock markets over the period from January
1980 to December 2003. The Hong Kong stock market return is
proxied by the PACAP value-weighted market return with cash
dividend reinvested while the US market return is proxied by
S&P 500 Composite Index return. Following Zhang (2010), market
volatility (annualized) in month t is calculated based on the sum of
P
0:5
t
squared returns in the month and is dened as: 12 Dd1
mret2td
,
where mret is market return, and Dt is the number of trading
day in month t.
The dotted line shows the time-series variation of the Hong
Kong market volatility and shaded area shows the variation of US
market volatility. The Hong Kong stock market is always more volatile than the US market, except from April 2002 to June 2003
when the US market is more volatile. Over the sample period,
the average volatility (annualized) of the Hong Kong stock market
is 24.0%, almost 60% higher than that of the US stock market, which
is 15.1%. In a robustness check, we use CRSP value-weighted portfolio return to proxy for the US market return and the nding is
essentially the same.
To save space, we only report results using the turnover ratio as
a liquidity proxy to construct the size-liquidity (BM-liquidity) portfolios. Table 1 presents descriptive statistics on the 25 portfolios. In
Panel A, under size- and liquidity-sorted portfolios, we observe
that, for small rms, the average size of the rm varies positively
with liquidity. For other-size rms, however, the relation between
size and liquidity is mixed. If the portfolios are sorted by BM and
liquidity (Panel B), we also nd no obvious relation between size
and liquidity. Similarly, we nd no obvious relation between BM
and liquidity after BM is controlled for. Therefore, if we nd that
liquidity has a signicant impact on stock return after size and
BM effects are controlled for, the liquidity effect is unlikely to be
related to size and BM.
Liquidity
Panel A
1
1
2
3
4
5
1
2
3
4
5
2,418,016.95
5,185,827.44
6,996,477.95
4,492,667.11
1,757,344.61
0.73296
0.73543
0.71327
0.72621
0.73010
0.6108
1.6422
3.0558
5.7403
17.3840
1
2
3
4
5
1,006,451.99
2,358,680.24
4,145,306.26
2,400,640.02
1,355,920.48
1.21893
1.22313
1.19297
1.18989
1.21475
0.5274
1.6015
3.1203
5.7118
13.9596
1
2
3
4
5
783,343.45
2,174,625.98
3,616,172.57
1,798,831.91
1,211,083.41
1.92894
1.91610
1.88967
1.87413
1.92608
0.5289
1.5974
3.0548
5.5564
16.3174
1
2
3
4
5
761,834.92
1,164,822.64
1,416,600.99
1,805,274.26
869,355.02
3.83377
3.84092
4.93753
4.08461
4.56782
0.5393
1.6417
3.0936
5.8593
16.3736
Liquidity rank
Panel C
1
2
3
Size rank
1
15.70
12.17
10.43
13.04
12.57
9.96
10.74
11.43
11.22
11.00
10.04
11.61
7.87
12.96
15.61
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
Table 1 (continued)
Liquidity rank
4
5
Size rank
1
10.91
9.83
11.04
12.39
11.91
13.52
12.04
14.43
13.74
8.91
9.09
11.52
12.52
13.83
12.26
13.30
12.87
11.48
10.96
10.13
14.78
12.30
11.83
10.39
9.87
13.57
12.09
9.74
11.78
11.57
BM rank
1
2
3
4
5
7.61
10.39
13.26
12.22
14.87
Mean
Std. dev.
t-Value
Minimum
Maximum
MP
1.1919
76.4260
8.7824
182.3932
2.25
6.96
45.7037
0.0014
31.3187
2213.3000
0.2753
0.8339
0.4231
1.2751
2.0976
1.2378
1.8232
0.0691
0.0467
0.0319
1.4878
0.4284
6.8210
4.7164
5.7092
6.4608
7.2888
6.2303
6.7940
4.4216
4.7031
3.8926
7.1607
6.5755
0.67
2.94
1.23
3.28
4.76
3.30
4.46
0.26
0.17
0.14
3.41
1.08
21.8056
12.8231
24.0413
38.2370
30.6944
37.5865
29.2942
24.9155
19.4234
17.1110
23.4793
28.2435
37.0940
24.6574
22.2109
28.1653
27.1043
21.5520
26.1724
13.4432
19.8990
20.0589
31.0714
28.4618
MP t MP2
SMB
HML
WML
LIQ1
LIQ2
LIQ3
LIQ4
LIQ5
LIQ6
LIQ7
LIQ8
LIQ9
2221
2222
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
Table 3
Correlations of the factor monthly returns July 1981June 2004. Pearson pair-wise correlations for the monthly time-series factor returns and the corresponding p-value are
reported. Panel A reports pair-wise correlations for the liquidity factors (LIQ1LIQ9) and Panel B reports pair-wise correlations for non-liquidity factors and the liquidity factor
constructed based on turnover ratio (LIQ1). All variables are dened in Table 2 and Appendix A.
LIQ1
LIQ2
LIQ3
LIQ4
0.7763
<0.0001
0.2167
0.0003
0.4855
<0.0001
0.0202
0.7384
0.3155
<0.0001
0.5578
<0.0001
LIQ7
LIQ8
LIQ9
1.0000
0.1337
0.0263
0.1512
0.0119
0.0739
0.2208
0.6080
<0.0001
0.7504
<0.0001
MPt MP2
LIQ6
1.0000
10
LIQ5
1.0000
0.8687
<0.0001
0.0405
0.5028
0.5541
<0.0001
0.4308
<0.0001
SMB
1.0000
0.0245
0.6854
0.3626
<0.0001
0.2023
0.0007
HML
1.0000
1.0000
0.0215
0.7248
0.0738
0.2217
0.7264
<0.0001
WML
1.0000
LIQ1
1.0000
0.0014
0.9812
0.0477
0.4305
0.1833
0.0022
1.0000
0.2551
<0.0001
0.1894
0.0016
1.0000
0.0728
0.2283
1.0000
factors (MP, SMB, and HML) are priced by Hong Kong stocks, while
the momentum factor (WML) is not. However, the large number of
signicant intercepts on Table 4 suggests that there may be missing factors that cannot be captured by the three-factor model. This
calls for additional factors to control for the remaining effects.
In Table 5, we report the regression results on the ve factors of
MP, SMB, HML, WML and LIQ (Eq. (4)). Panel A reports the results on
size- and liquidity-sorted portfolios, while panel B reports those on
BM- and liquidity-sorted. Similar to the results of the three-factor
model (Table 4), small rms tend to have positive intercepts, while
big rms tend to have negative intercepts (Panel A). Only 6 intercepts, however, are signicantly different from zero at the 5% level,
compared to 12 signicant intercepts in Table 5. Although the GRS
F-test still shows that the intercepts are jointly signicantly different from zero, we observe a signicant reduction in the F-statistics
from the three-factor model (4.70) to the liquidity ve-factor model (3.03). We observe a similar pattern when we use alterative
liquidity measures to construct size-liquidity portfolios.
Most of the intercepts for BM- and liquidity-sorted rms are
statistically insignicant with no obvious difference between
low-BM and high-BM rms (Panel B). This pattern is different from
that of the three-factor model (Table 4). Only one intercept is signicant at the 5% level, compared to 11 in Table 4. The GRS F-test
does not reject the null hypothesis that the intercepts are jointly
equal to zero.
Table 5 also shows that most of the factor coefcients are significant, with MP being the strongest. All of the MP coefcients are
signicant, while at least 17 of the coefcients of SMB, HML, and
LIQ are signicant at the 5% level. As documented in most previous
studies, the average MP coefcient is close to 1.0, the coefcient of
SMB decreases as size increases (Panel A), and the coefcient on
HML increases as BM increases (Panel B). The LIQ coefcients tend
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K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
Table 4
Results from the FamaFrench three-factor regressions for the monthly returns of the 25 size-liquidity portfolios and BM-liquidity portfolios July 1981 to June 2004.
rp,t rf,t = ai + bpMPt + spSMBt + hpHMLt + ep,t. The table reports the coefcients with the corresponding t-statistics from the FamaFrench three-factor regressions for the monthly
returns of the 25 size-liquidity portfolios (Panel A) and BM-liquidity portfolios (Panel B). The GRS F-test for the null hypothesis that the 25 coefcients of the intercept terms are
jointly equal to zero and the corresponding p-value are reported at the bottom of each panel.
Liquidity quintile
Size quintile
a
Panel A
1
2
3
4
5
t(a)
1.958
1.412
1.510
0.457
0.132
0.489
0.729
0.353
0.074
1.202
0.477
0.432
1.077
1.186
2.843
0.433
0.304
1.015
1.993
2.106
0.234
0.367
0.294
0.996
1.233
4.23
2.80
2.39
0.65
0.21
1.44
1.70
0.88
0.13
2.17
1.41
1.39
3.06
2.71
6.80
1.33
0.85
3.15
6.02
4.22
0.60
1.37
1.47
3.34
2.69
0.740
0.912
0.946
0.980
1.319
0.609
1.002
0.941
1.093
1.100
0.701
0.833
1.064
1.139
1.209
0.655
0.919
1.019
1.089
1.323
0.750
0.970
1.021
1.154
1.233
15.44
20.01
20.14
16.56
17.10
17.79
23.00
26.02
22.53
24.90
17.36
22.08
27.37
28.33
22.84
16.54
31.07
43.95
33.35
23.39
0.987
1.081
1.380
1.121
1.273
0.568
0.860
0.836
1.031
1.053
0.332
0.477
0.768
0.783
0.709
0.239
0.267
0.284
0.435
0.408
0.044
0.140
0.113
0.015
0.084
11.53
13.86
14.49
12.52
13.12
6.74
10.56
15.04
12.37
11.70
5.07
5.14
6.11
9.06
5.65
0.78
3.59
3.90
0.36
1.28
0.296
0.038
0.103
0.872
0.422
0.371
0.119
0.332
0.229
0.313
0.246
0.281
0.488
0.204
0.502
0.393
0.130
0.473
0.272
0.261
0.097
0.223
0.117
0.430
0.364
5.09
1.30
3.88
1.88
2.63
3.39
4.19
6.46
2.17
5.59
5.63
1.69
6.70
3.82
2.44
1.17
3.86
2.72
6.72
3.78
0.60
0.68
0.71
0.61
0.63
0.60
0.72
0.78
0.71
0.76
0.60
0.67
0.78
0.78
0.69
0.53
0.81
0.89
0.83
0.71
1.87
2.19
1.78
3.15
4.06
1.97
0.69
0.33
1.47
2.60
2.41
0.72
2.21
0.07
2.01
0.98
0.97
0.53
1.86
2.51
14.63
21.24
27.40
27.80
20.63
19.00
25.91
22.76
23.30
19.34
12.49
20.84
26.96
20.92
20.56
14.47
20.75
20.37
20.28
19.33
7.41
8.67
8.10
9.96
10.65
9.16
9.89
10.33
11.77
8.86
10.72
9.08
12.10
11.30
9.39
10.43
12.42
9.40
10.92
8.23
1.36
0.10
2.93
3.19
2.45
3.24
0.95
2.36
4.37
3.22
4.54
2.67
6.53
6.85
6.07
6.82
7.67
8.89
7.87
7.35
b
1
2
3
4
5
t(b)
s
1
2
3
4
5
t(s)
h
1
2
3
4
5
13.70
15.54
12.89
11.97
18.13
14.61
14.74
15.11
11.04
14.01
t(h)
2.87
0.35
0.76
5.63
3.14
R2
1
2
3
4
5
0.61
0.62
0.58
0.55
0.66
BM quintile
a
Panel B
1
2
3
4
5
t(a)
0.327
0.193
0.368
1.505
2.239
0.860
0.805
0.518
1.108
2.092
0.658
0.221
0.132
0.599
1.482
0.995
0.282
0.740
0.030
1.060
0.470
0.405
0.226
0.884
1.343
0.637
0.928
0.926
1.011
1.174
0.780
0.908
0.824
1.135
1.234
0.736
0.972
1.053
1.100
1.282
0.598
0.946
1.050
1.086
1.260
0.807
1.004
1.005
1.117
1.200
0.210
0.322
0.431
0.526
0.786
0.493
0.463
0.341
0.507
0.795
0.443
0.463
0.596
0.693
0.733
0.641
0.515
0.588
0.733
0.718
0.726
0.750
0.579
0.751
0.645
b
1
2
3
4
5
t(b)
s
1
2
3
4
5
11.48
22.39
22.11
16.01
20.82
t(s)
h
1
2
3
4
5
0.74
0.54
1.02
2.77
4.61
3.29
6.23
8.24
6.67
11.16
t(h)
0.076
0.125
0.138
0.400
0.150
0.134
0.008
0.183
0.240
0.271
0.232
0.066
0.202
0.381
0.395
0.401
0.224
0.470
0.657
0.687
0.703
0.686
0.810
0.794
0.843
0.64
0.74
0.53
0.67
0.60
0.73
0.81
1.63
1.79
3.43
1.44
R2
1
2
0.38
0.66
0.51
0.65
2224
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
Table 4 (continued)
Liquidity quintile
Size quintile
a
t(a)
1
3
4
5
2
0.66
0.51
0.66
3
0.76
0.77
0.67
4
0.70
0.73
0.64
5
0.78
0.71
0.69
0.71
0.71
0.67
to be positive for small rms and negative for big rms, and positive for illiquid rms and negative for liquid rms. Only a few coefcients of WML are statistically signicant at the 5% level. The
results show that the WML factor does not play a signicant role
in pricing Hong Kong stocks. In an unreported robustness check,
we estimate the Eq. (3) (the model with MP, SMB, HML and LIQ
as factors) and nd that the factor coefcients are very close to
those reported on Table 5. This suggests that a liquidity four-factor
(MKT, SMB, HML, and LIQ) model works well enough in the Hong
Kong stock market. Finally, the adjusted R2s of the ve-factor
regressions mostly range from 0.50 to 0.90 in individual regressions, except one with a very few low R2s (<0.40). The results on
Tables 4 and 5 indicate that adding two more factors (WML and
LIQ) to the three-factor model have impacts on the three-factor
coefcients. For the three-factor model (Table 4), the market beta
coefcients increase down the columns but remain at across
rows. However, the variations on the beta coefcients are narrower
for the ve-factor model (Table 5). For example, the beta coefcients of the smallest rms range from 0.740 to 1.319 for the
three-factor model while those for the ve-factor model range
from 0.918 to 1.126. We observe a similar pattern for the SMB
and HML coefcients. After adding two more factors, the SMB
coefcients become more positive for the least liquid stocks and
less positive for the most liquid stocks. The impacts of the two
factors on the HML coefcients are similar but less dramatic.
Despites these differences, the signicance of the factor coefcients remains quite stable even after we add two more factors into
the three-factor model.
Overall, Table 5 suggests that it is important to include a liquidity factor in asset pricing models for Hong Kong. After adding a
liquidity factor to the three-factor model, the number of signicant
intercepts is reduced, as are the GRS F-test statistics.
We also re-run the ve-factor (FamaFrench three factors,
momentum factor, and liquidity factor) models by dividing the
sample period into two: (1) before April 1986 when the four exchanges were not merged, and (2) in and after April 1986 when
the four exchanges are unied. Consistent with our results for
the whole sample period, liquid stocks have negative liquidity factor loadings and illiquidity stocks have positive liquidity factor
loadings in both sub-periods after controlling for size or BM. However, the number of signicant intercepts (at the 5% level) in the
second sub-period (6/3) is larger than that in the rst sub-period
(2/0) when size-liquidity/BM-liquidity portfolios are used. This
suggests the ve-factor model is a better model for the rst subperiod than for the second sub-period.
Table 6 reports the trends of the intercepts for various models.
Panels A and B report the results sorted by size and book-tomarket ratio, respectively. Both panels show that there is a consistent pattern in the intercepts for three-moment and three-factor
models. The intercepts decrease from the lowest-liquidity portfolio
to the highest-liquidity portfolio. When liquidity is included as a
factor into the model (liquidity four-factor and ve-factor models),
however, the decreasing trend in the intercepts vanishes. Most of
the intercepts for the two models do not exhibit any trend, except
the middle-size (Panel A) and largest BM (Panel B) portfolios. This
nding suggests that liquidity is not related to size and bookto-market ratio and that liquidity is an independent factor which
explains stock returns in the Hong Kong market.
With the favorable results in Tables 5 and 6 on the intercepts
and coefcients of the risk factors, the liquidity four-factor model
(MKT, SMB, HML, and LIQ) seems to work well in the Hong Kong
stock market.11
4.3. Comparison of three- and ve-factor (or four-factor) models
To investigate further whether the liquidity ve-factor (or fourfactor) model is better than the three-factor model, we check the
improvement in the number of insignicant intercepts and the
percentage increase in the adjusted R2s of the two models. If one
model is better than the other, we expect to see an increase in
the number of insignicant intercepts and adjusted R2s.
The number of insignicant intercepts is substantially greater
for the liquidity ve-factor (or four-factor) model than for the
three-factor model. For example, compare the Panel B of Table 4
with the Panel B of Table 5. The number of insignicant intercepts
increases from 14 (three-factor) to 24 (ve-factor). This represents
an overall increase of 71% for the insignicant intercepts when the
liquidity ve-factor (or four-factor) model is used instead of the
three-factor model. The adjusted R2s also increase by an average
of 4% across the board if we switch from the three-factor model
to the liquidity ve-factor (or four-factor) model.
The substantial increase in insignicant intercepts, together
with the modest increases in adjusted R2s, shows that the liquidity
ve-factor (or four-factor) model signicantly improves the explanation power on the excess expected stock returns over the threefactor model. Therefore, the results suggest that using the liquidity
ve-factor (or four-factor) model (MKT, SMB, HML, LIQ and/or
MOM) as the benchmark model is a more appropriate choice than
using the three-factor or momentum four-factor (MKT, SMB, HML,
and MOM) models.
4.4. Robustness tests
To further check the validity of the liquidity ve-factor (or fourfactor) model, we conduct the following three robustness tests: a
possible additional factor check (using portfolio residuals and
higher moment coskewness factor), a seasonality check (on
months, especially on January vs. non-January months), and a conditional market check (on up- and down-markets).12
11
In a robustness check, we calculate value-weighted returns, instead of equallyweighted returns, of those 25 testing portfolios and our main ndings in Tables 46
generally hold. However, our results show that using value-weighted portfolio
returns results in a larger number of negative coefcients and the intercepts generally
are more negative in for the largest rms. A possible explanation for this is that we
put more weights on large stocks in calculating value-weighted returns than in
calculating equally-weighted returns. As large stocks are found to underperform
small stocks, the use of value-weighted returns will result in
more negative
coefcients if SMB cannot fully capture cross-sectional variations in returns between
small and big stocks.
12
To save space, results are not reported but are available upon request.
2225
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
Table 5
Results from the ve-factor (FamaFrench three factors plus momentum factor and liquidity factor) regressions for the monthly returns of the 25 size-liquidity portfolios and BMliquidity portfolios July 1981June 2004. rp,t rf,t = ap + pMPt + spSMBt + hpHMLt + wpWML + pLIQt + p,t. The table reports the coefcients with the t-statistics from the ve-factor
(FamaFrench three factors plus liquidity factor and momentum factor) regressions for the monthly returns of the 25 size-liquidity portfolios (Panel A) and BM-liquidity
portfolios (Panel B). The GRS F-test for the null hypothesis that the 25 coefcients of the intercept terms are jointly equal to zero and the corresponding p-value are reported at the
bottom of each panel.
Liquidity quintile
Size quintile
a
t(a)
1
Panel A
1
2
3
4
5
1.193
0.766
0.634
1.599
1.287
0.515
0.589
0.487
0.799
0.435
0.265
0.443
0.801
0.156
1.497
0.654
0.485
0.521
1.262
0.306
0.425
0.403
0.088
0.363
0.025
0.918
1.044
1.126
0.702
1.002
0.821
1.029
0.971
0.905
0.740
0.858
0.841
1.010
0.922
0.916
0.708
0.882
0.912
0.934
0.939
0.790
0.975
0.939
1.022
0.992
1.096
1.164
1.480
0.952
1.077
0.688
0.873
0.860
0.920
0.835
0.422
0.487
0.741
0.655
0.535
0.274
0.248
0.222
0.345
0.185
0.067
0.140
0.161
0.058
0.048
0.382
0.059
0.086
0.687
0.282
0.373
0.102
0.370
0.197
0.197
0.259
0.322
0.521
0.212
0.434
0.437
0.141
0.459
0.258
0.217
0.095
0.202
0.104
0.440
0.410
0.119
0.745
0.103
0.006
0.167
0.053
0.131
0.140
0.186
0.048
0.115
0.060
0.046
0.048
0.083
0.032
0.072
0.008
0.113
0.312
0.523
0.068
0.082
0.462
0.880
0.389
0.016
0.135
0.540
0.717
0.126
0.091
0.263
0.384
0.947
0.100
0.014
0.202
0.327
0.618
0.71
0.68
0.71
0.64
0.72
0.65
0.72
0.79
0.77
0.83
0.61
0.67
0.80
0.81
0.81
0.53
0.81
0.90
0.86
0.80
b
1
2
3
4
5
0.161
0.010
0.164
0.328
0.273
1.67
1.29
1.15
1.37
0.85
0.79
1.35
2.18
0.37
4.02
1.91
1.28
1.58
3.88
0.74
1.03
1.41
0.44
1.24
0.06
14.75
15.07
13.12
7.44
12.40
20.24
17.12
17.34
11.74
11.00
19.48
19.38
2.84
16.81
18.65
15.69
17.63
20.87
21.74
17.12
14.42
25.92
35.34
26.59
18.61
16.19
15.26
15.87
9.37
12.23
15.58
13.38
14.17
10.96
11.40
8.80
10.29
14.02
10.89
9.99
5.57
4.54
4.70
7.37
3.10
1.12
3.41
4.56
1.39
0.83
0.439
0.328
0.444
0.674
0.773
3.78
0.54
0.63
4.47
2.19
5.80
1.07
4.17
1.61
1.84
3.70
4.67
6.76
2.43
5.55
6.10
1.78
6.47
3.78
2.49
1.09
3.38
2.46
7.20
4.89
2.27
0.96
1.43
0.06
1.93
0.93
2.34
2.24
2.61
0.75
1.97
0.93
0.81
0.87
1.18
0.46
1.49
0.22
2.29
4.53
9.43
0.83
1.07
4.38
9.57
6.45
0.27
2.03
7.45
10.68
2.04
1.33
4.37
6.63
12.63
1.34
0.26
5.55
6.21
8.54
0.58
2.38
1.72
0.51
1.77
0.44
0.22
0.09
0.02
0.03
0.27
0.03
1.60
1.06
1.24
1.61
0.13
0.89
0.69
1.40
14.37
17.30
22.70
21.52
14.65
18.73
22.16
18.49
17.53
13.40
16.20
18.41
21.68
15.83
14.29
17.66
18.60
16.36
14.24
13.38
8.30
8.14
10.35
9.76
13.91
9.16
13.28
12.54
t(w)
w
1
2
3
4
5
t(h)
w
1
2
3
4
5
t(s)
h
1
2
3
4
5
2.56
1.45
0.97
2.25
2.10
t(b)
s
1
2
3
4
5
1.98
0.11
1.48
2.72
2.62
t(w)
5.16
3.45
3.79
5.17
6.99
R2
1
2
3
4
5
0.64
0.63
0.60
0.59
0.71
BM quintile
a
Panel B
1
2
3
4
5
t(a)
0.153
0.172
0.164
0.416
0.828
0.276
0.927
0.532
0.173
0.894
0.150
0.076
0.038
0.008
0.016
0.104
0.014
0.569
0.496
0.588
0.733
0.059
0.394
0.317
0.620
b
1
2
3
4
5
t(b)
0.738
1.007
0.879
0.783
0.877
0.903
0.887
0.926
0.938
0.975
0.847
1.003
1.034
0.969
0.960
0.837
1.000
1.015
0.974
0.904
1.058
1.077
0.972
0.857
0.780
0.268
0.369
0.574
0.455
0.511
0.482
0.783
0.543
0.867
0.791
s
1
2
0.33
0.46
0.43
0.77
1.88
12.18
20.39
17.45
11.02
15.05
t(s)
4.05
6.86
2226
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
Table 5 (continued)
Liquidity quintile
Size quintile
a
t(a)
1
3
4
5
2
0.401
0.398
0.617
3
0.341
0.395
0.641
4
0.586
0.616
0.545
5
0.569
0.668
0.508
1
0.563
0.597
0.400
7.67
8.31
8.84
9.62
10.22
6.97
11.16
9.96
7.43
8.69
9.10
6.30
1.82
0.32
2.66
3.37
2.02
3.74
0.99
2.33
4.02
3.04
5.58
2.35
6.45
6.61
6.19
7.28
7.46
8.78
7.74
8.49
0.97
1.91
0.67
1.71
0.41
0.96
0.02
0.39
0.18
0.34
0.67
1.44
0.92
0.37
0.18
2.32
0.55
1.09
0.28
0.85
3.53
0.78
0.09
8.19
7.00
4.42
1.25
0.62
4.27
8.07
8.30
1.81
1.34
3.28
10.18
7.60
2.28
1.01
7.75
12.98
t(h)
1
2
3
4
5
0.069
0.107
0.167
0.390
0.152
1
2
3
4
5
0.039
0.011
0.068
0.169
0.171
0.181
0.026
0.172
0.234
0.213
0.269
0.071
0.207
0.353
0.346
0.459
0.203
0.480
0.646
0.618
0.693
0.686
0.829
0.740
0.786
0.079
0.127
0.035
0.096
0.035
0.056
0.001
0.028
0.013
0.032
0.045
0.101
0.056
0.029
0.015
0.179
0.041
0.083
0.022
0.064
0.305
0.055
0.005
0.488
0.637
0.274
0.077
0.047
0.323
0.791
0.586
0.135
0.086
0.276
0.875
0.622
0.180
0.083
0.638
1.035
0.53
0.66
0.76
0.82
0.72
0.66
0.74
0.70
0.75
0.71
0.62
0.67
0.79
0.72
0.78
0.68
0.73
0.71
0.76
0.80
0.250
0.194
0.113
0.564
0.734
0.72
1.36
2.09
3.46
1.64
t(w)
w
1
2
3
4
5
2
7.30
5.14
9.72
0.50
0.17
1.04
1.84
2.27
t(w)
3.01
2.88
1.64
5.80
9.21
R2
1
2
3
4
5
0.40
0.67
0.67
0.57
0.75
2227
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
Table 6
Comparison of the intercepts from alternative factor models for monthly returns of the 25 size-liquidity portfolios and BM-liquidity portfolios July 1981June 2004. The table
reports the intercept coefcients with the corresponding t-statistics from alternative factor model regressions for the monthly returns of the 25 size-liquidity portfolios (Panel A)
and BM-liquidity portfolios (Panel B). Besides, within each size or BM quintile, a hedging portfolio is formed between the most liquid stock (liquidity quintile 5) and the least
liquid stock (liquidity quintile 1) and its monthly return is regressed on the factors. The intercept coefcient and t-test statistics from factor model regression is reported on the
row (5) (1).
Liquidity quintile
Size quintile
a
t(a)
2.268
2.289
1.895
1.154
1.240
1.120
1.197
1.127
1.156
0.183
1.206
0.302
0.095
0.290
1.930
0.290
0.714
0.630
1.296
2.002
0.406
0.154
0.202
0.713
0.867
3.32
3.13
2.04
1.19
1.38
2.42
1.97
1.97
1.50
0.24
3.02
0.74
0.18
0.49
3.35
0.76
1.76
1.58
3.12
3.48
0.98
0.51
0.90
2.05
1.70
1.101
1.303
3.136
2.292
1.388
1.43
1.57
5.25
3.90
2.18
Panel A
3-moment
1
2
3
4
5
(5) (1)
3-factor
1
2
3
4
5
1.958
1.412
1.510
0.457
0.132
0.489
0.729
0.353
0.074
1.202
0.477
0.432
1.077
1.186
2.843
0.433
0.304
1.015
1.993
2.106
0.234
0.367
0.294
0.996
1.233
4.23
2.80
2.39
0.65
0.21
1.44
1.70
0.88
0.13
2.17
1.41
1.39
3.06
2.71
6.80
1.33
0.85
3.15
6.02
4.22
0.60
1.37
1.47
3.34
2.69
(5) (1)
2.046
1.691
3.326
1.673
1.105
2.80
2.56
6.68
3.33
2.02
1.222
0.764
0.604
1.559
1.231
0.539
0.575
0.467
0.800
0.401
0.276
0.416
0.772
0.122
1.507
0.630
0.497
0.514
1.252
0.289
0.431
0.418
0.090
0.339
0.045
2.61
1.45
0.92
2.16
1.99
1.74
1.27
1.10
1.37
0.78
0.83
1.26
2.09
0.29
4.05
1.83
1.31
1.56
3.85
0.69
1.04
1.47
0.45
1.15
0.11
0.081
0.940
1.237
0.342
0.381
0.10
1.67
2.97
0.68
0.65
0.265
0.443
0.801
0.156
1.497
1.238
0.654
0.485
0.521
1.262
0.306
0.348
0.425
0.403
0.088
0.363
0.025
0.312
2.56
1.45
0.97
2.25
2.10
0.00
1.67
1.29
1.15
1.37
0.85
1.66
0.79
1.35
2.18
0.37
4.02
2.98
1.91
1.28
1.58
3.88
0.74
0.69
1.03
1.41
0.44
1.24
0.06
0.55
1.193
0.766
0.634
1.599
1.287
0.001
0.515
0.589
0.487
0.799
0.435
0.950
BM quintile
a
t(a)
Panel B
3-moment
1
2
3
4
5
0.867
0.258
0.084
0.909
1.396
1.385
1.218
0.165
0.516
1.318
1.096
1.070
0.310
0.508
1.039
1.451
0.922
0.086
0.913
0.219
1.020
1.007
1.194
0.220
0.272
1.81
0.62
0.19
1.43
2.22
2.54
2.72
0.47
1.15
1.97
2.62
2.69
0.61
0.93
1.46
2.65
1.90
0.18
1.47
0.32
1.56
1.67
2.04
0.33
0.39
(5) (1)
2.294
2.738
2.135
1.680
1.258
3.13
3.94
3.14
2.23
1.51
3-factor
1
2
3
4
5
0.327
0.193
0.368
1.505
2.239
0.860
0.805
0.518
1.108
2.092
0.658
0.221
0.132
0.599
1.482
0.995
0.282
0.740
0.030
1.060
0.470
0.405
0.226
0.884
1.343
0.74
0.54
1.02
2.77
4.61
1.87
2.19
1.78
3.15
4.06
1.97
0.69
0.33
1.47
2.60
2.41
0.72
2.21
0.07
2.01
0.98
0.97
0.53
1.86
2.51
(5) (1)
2.575
3.045
2.141
2.050
1.771
3.98
4.87
3.60
3.34
2.50
0.162
0.170
0.178
0.381
0.793
0.297
0.953
0.540
0.154
0.901
0.162
0.075
0.032
0.005
0.022
0.094
0.007
0.558
0.502
0.585
0.772
0.050
0.411
0.312
0.633
0.35
0.46
0.47
0.70
1.78
0.62
2.44
1.75
0.46
1.57
0.47
0.22
0.08
0.01
0.04
0.24
0.02
1.57
1.08
1.23
1.69
0.12
0.91
0.69
1.43
(5) (1)
0.633
1.285
0.140
0.684
1.463
0.99
1.91
0.24
1.39
2.83
2228
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
Table 6 (continued)
Liquidity quintile
Size quintile
a
1
t(a)
2
0.150
0.076
0.038
0.008
0.016
0.135
0.104
0.014
0.569
0.496
0.588
0.696
0.733
0.059
0.394
0.317
0.620
1.411
0.33
0.46
0.43
0.77
1.88
1.07
0.58
2.38
1.72
0.51
1.77
1.87
0.44
0.22
0.09
0.02
0.03
0.23
0.27
0.03
1.60
1.06
1.24
1.41
1.61
0.13
0.89
0.69
1.40
2.77
0.153
0.172
0.164
0.416
0.828
0.681
0.276
0.927
0.532
0.173
0.894
1.256
The above three robustness tests show that the favorable liquidity factor model test results are driven by neither seasonality nor
up- and down-market conditions. In addition, no extra important
factors are found to price the cross-sectional stock returns beyond
the four factors, MP, SMB, HML and LIQ, in the Hong Kong stock
market.
Finally, we also check if our results are robust to the alternative
denitions of liquidity factors. We have re-run the regressions for
25 size-liquidity portfolio returns using liquidity factors constructed by other liquidity measures. In general, liquidity factors
given by turnover ratio (LIQ1), trading volume (LIQ2), the standard
deviation of turnover ratio (LIQ3) and the standard deviation of
trading volume (LIQ4) produce the best and most consistent results
(with liquidity factor loadings high for illiquid stocks and low for
liquid stock, and low numbers of signicant intercepts (5 to 7)).
Liquidity factors given by the CV of turnover (LIQ5), the CV of trading volume (LIQ6) and Pastor and Stambaughs (2003) measure
(LIQ7) produce the worst and inconsistent results (no observable
pattern in liquidity factor loadings, and high numbers of signicant
intercepts (12)). Liquidity factors given by Amihuds (2002) measure (LIQ8) and Lius (2006) measure (LIQ9) produce the pattern
of factor loadings consistent with our expectation but the numbers
of signicant intercepts are still high (10 to 11). The nding is consistent with Table 2 that the liquidity factors LIQ5, LIQ6 and LIQ7
are associated very low factor premiums and Table 3 that they
are mostly insignicantly or negatively related to other liquidity
factors. This is also consistent with Keene and Peterson (2007)
who nd that the results for the CV of dollar volume and the CV
of turnover are generally insignicant.
5. Conclusions
In this paper, we address the importance of liquidity in pricing
returns in the context of known time-series determinants in Hong
Kong. Previous studies do not adequately address the relations
among liquidity, traditional important asset pricing factors, and
stock returns in the Hong Kong and Asian stock markets. We hope
that studying a highly volatile market such as Hong Kong
provides better and more robust results on the return-liquidity
(illiquidity) relation and helps shed light on this issue in the
literature.
We investigate whether liquidity has signicant effect on stock
returns after controlling for well-known stock-return factors.
These well-documented factors are the FamaFrench three factors,
momentum, and the higher moment-coskewness factors. Although
these are well-known factors in explaining stock returns in the US,
their joint effect with liquidity is seldom studied in emerging and
Asian markets.
We adopt a time-series regression approach to study the return-liquidity relation by employing nine widely used liquidity
(illiquidity) proxies in our study. We adjust the stock returns by
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
sign r 0i;d;t mi;d;t ei;d1;t ;
d 1; . . . ; DD > 15
ri,d,t is the return on stock i on day d in month t; r 0i;d;t r i;d;t r m;d;t
where rm,d,t is the market return on stock i on day d in month t; mi,d,t
is the dollar volume for stock I on day d in month t;
Stocks with stock price less than $5 and greater than $1000 are
excluded.
The liquidity measure over 12 months before July is constructed
as follows:
^
ci 1=N
2229
SMB
Similarly, HML (high minus low) is the simple average of the returns
on the high-BM portfolios minus the returns on the low-BM
portfolios:
HML
WML
12
Dt
X
!0:5
mret2td
d1
1980m1
1.2
.2
0
.2
.4
.6
.8
1.4
K.S.K. Lam, L.H.K. Tam / Journal of Banking & Finance 35 (2011) 22172230
1.4
2230
1985m1
1990m1
1995m1
Month
HK market volatility
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