Market liquidity risk factor and financial market anomalies: Evidence from the Chinese stock market

Article history: Received 16 May 2009 Accepted 29 July 2010 Available online 6 August 2010 The Chinese stock market is an order-driven market and hence its characteristics are structurally different from quote-driven markets. There are no studies that consider the role of the market liquidity risk factor in determining cross-sectional stock returns in a model including financial market anomalies for order-driven markets. Our aim is to test whether financial market anomalies such as firm size, the book-to-market ratio, the turnover rate, and momentum both with andwithout the inclusion of themarket liquidity risk factor in the case of the Chinese stock market can explain cross-sectional stock returns. The empirical framework is based on the model proposed by Avramov and Chordia (AC, 2006). Our main finding is that the AC model can capture financial market anomalies except momentum when we include the market liquidity risk factor on the Chinese stock market. © 2010 Elsevier B.V. All rights reserved. JEL Classification: G10 G15