Low liquidity beta anomaly in China

• Published in: Emerging markets review Vol. 50; p. 100832
• Main Authors: Frömmel, Michael, Han, Xing, Li, Youwei, Vigne, Samuel A.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-03-2022
• Subjects: Asset pricing; China; Liquidity; Liquidity beta; Sentiment; China; Liquidity beta; Liquidity; G12; G15; Sentiment; Asset pricing
• ISSN: 1566-0141; 1873-6173
• DOI: 10.1016/j.ememar.2021.100832

The conventional risk-based theory does not reconcile with the liquidity-beta anomaly in China: Low liquidity-beta stocks outperform high liquidity-beta stocks on a risk-adjusted basis. This striking pattern is robust to different weighting schemes, competing factor models, and other well-known return determinants in the cross section. We propose a competing behavioral-based explanation on the low liquidity beta anomaly in China. Consistent with our new perspective, liquidity beta is a negative return predictor in the cross section. Moreover, the time variation of the return differential between low and high liquidity beta stocks is led by investor sentiment after accounting for other possible economic mechanism.
•Low liquidity-beta stocks outperform high ones on a risk-adjusted basis in China.•The pattern is robust to weighting schemes, factor models, and other determinants.•Liquidity beta is a negative return predictor in the cross section.•We propose a behavioral-based explanation on the low liquidity-beta anomaly.•The investor sentiment explanation prevails over other possible economic mechanism.