Performances of liquidity factors in the stock market cycle: evidence from the Tokyo Stock Exchange
ISSN: 0307-4358
Article publication date: 16 June 2021
Issue publication date: 22 October 2021
Abstract
Purpose
The purpose of this study is to examine the performances of liquidity factors in the stock market cycle. It aims to investigate whether the contribution of liquidity factors changes with stock market trends.
Design/methodology/approach
Six liquidity proxies and two-factor construction methods are compared in this study. The spanning regression method was applied to examine the contribution of liquidity factors to the asset pricing model, while the Fama and MacBeth regression method was used for examining the pricing power of liquidity factors.
Findings
The result shows that liquidity factors are accretive to models explaining returns in bull markets but not accretive to models in bear markets. The most appropriate method of constructing liquidity factors in the Japanese stock market has also been clarified.
Originality/value
In the Japanese stock market, there has never been a comprehensive test of the role of the liquidity risk factor in different market trends using the long-run data. This study helps with identifying the importance of liquidity pricing risk in different market trends. It also fills the gaps by comparing liquidity factors that are constructed through different methods and proxies and provides evidence for further confirming the correct asset pricing model in the future.
Keywords
Acknowledgements
The author thanks Prof. Wataru Ohta (Osaka University) for his suggestions that greatly improved this study, and Prof. Hitoshi Takehara (Waseda University) for helping to calculate the liquidity proxies in Section 2.2. The author also thanks Prof. Kazuhiko Ohashi (Hitotsubashi University) for his comments at the 1st Fall Conference of the Nippon Finance Association, and Dr Don Johnson (Editor, Managerial Finance) and anonymous reviewers for their time and effort to help the author improve the quality of this study.
Citation
Zhong, X. (2021), "Performances of liquidity factors in the stock market cycle: evidence from the Tokyo Stock Exchange", Managerial Finance, Vol. 47 No. 11, pp. 1588-1607. https://doi.org/10.1108/MF-04-2020-0179
Publisher
:Emerald Publishing Limited
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