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This dissertation is inspired by the prosperous and development of China stock market.The growth rate of stock market and rise of China’s economy has acquired worldwide attention.This dissertation is trying to answer the question “what the relationship between liquidity and asset pricing in a fast growth market,and in this background,and why it is important to China stock market”.There are many empirical study have been done last decades,Since Amihud and Mendelson (1986,1988) find a return-illiquidity relation,many other researchers continue to study the relationship between return and Illiquidity(liquidity),liquidity and asset price theory obtain considerable development within the framework of standard asset pricing theory.The most*…show more content…*

Traditional liquidity and asset pricing theory The fundamental theorem of asset pricing based on an abundance of liquidity believe that:any financial asset,which have the same cash flow,should be trade with same price,the equilibrium of market is decided by personal arbitraging and optimal investment decision.(cochrane.2001,2005).The illiquidity of market will lead asset pricing deviate from prospective value calculated by standard asset pricing.One of idea and method bring liquidity into standard asset pricing is to not to change other assumption of standard asset pricing theory,by bring transaction costs as a major factor of weakening market liquidity,and consider the effect of transaction costs for the assets or cash flow payment structures,using the general equilibrium analysis studies the relationship between liquidity and asset pricing,which constitutes the basic theory liquidity and asset pricing theory.This theory is a continuation and correction of the traditional asset pricing theory from the perspective of transaction costs. Traditional asset pricing theory based on three core assumption,There are no other factors that effect market liquidity except transaction costs,investors are rational,and liquidity premium is not restrained by the mechanism of exchange. As a pioneer of liquidity and asset pricing theory amhud (1986,1988) put forward an transaction dividend discount model by

Traditional liquidity and asset pricing theory The fundamental theorem of asset pricing based on an abundance of liquidity believe that:any financial asset,which have the same cash flow,should be trade with same price,the equilibrium of market is decided by personal arbitraging and optimal investment decision.(cochrane.2001,2005).The illiquidity of market will lead asset pricing deviate from prospective value calculated by standard asset pricing.One of idea and method bring liquidity into standard asset pricing is to not to change other assumption of standard asset pricing theory,by bring transaction costs as a major factor of weakening market liquidity,and consider the effect of transaction costs for the assets or cash flow payment structures,using the general equilibrium analysis studies the relationship between liquidity and asset pricing,which constitutes the basic theory liquidity and asset pricing theory.This theory is a continuation and correction of the traditional asset pricing theory from the perspective of transaction costs. Traditional asset pricing theory based on three core assumption,There are no other factors that effect market liquidity except transaction costs,investors are rational,and liquidity premium is not restrained by the mechanism of exchange. As a pioneer of liquidity and asset pricing theory amhud (1986,1988) put forward an transaction dividend discount model by

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