Study on liquidity premium based on three-moment capital asset pricing model

Abstract

This paper discusses the liquidity premium based on three-moment capital asset pricing model. The study sample is A-share listed in Shanghai and Shenzhen stock exchanges before January 1997. The study is to test whether the three-moment model is able to explain the liquidity risk completely, and whether there is illiquidity premium in China's stock market. The empirical results indicate that three-moment model does not capture the liquidity premium adequately, and liquidity premium exists in China's A-share market. In addition, the empirical results reveal that investors have a preference for positive skewness, which they are willing to pay for.