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
Page 3: Introduction to the Financial System Page 7: Commercial Banks Page 12: The Share Market and the Corporation Page 15: Corporations Issuing Equity into the Share Market Page 19: Investors in the Share Market Page 24: Short-term Debt Page 28: Medium- to Long-term Debt Page 32: Interest Rate Determination and Forecasting Page 37: The Foreign Exchange Market Page 40: Factors that Influence the Exchange Rate Page 42: Futures Contracts and Forward Rate Agreements Page 47: Options
The authors also performed an analysis to find the source of the common factor structure. However, liquidity risk exposure greatly influences value and momentum strategies. In fact, it is negatively related to value returns and positively related to momentum returns in
We use Capital Asset Pricing Model (CAPM) approach to calculate the cost of equity. The formula of CAPM is re = rf + β × (E[RMkt] – rf).
In order to study how stock prices react to these events, approximate three years of continuous daily stock price are chose, beginning at 17th March 2008 and ending more than three months after the final event at 22nd April 2011. In addition, SHANGHAI Stock Exchange Index (SSE) is adopted as a proxy of the market portfolio.
Week 1 – Introduction – Financial Accounting (Review) Week 2 – Financial Markets and Net Present Value Week 3 – Present Value Concepts Week 4 – Bond Valuation and Term Structure Theory Week 5 – Valuation of Stocks Week 6 – Risk and Return – Problem Set #1 Due Week 7* – Midterm (Tuesday*) Week 8 - Portfolio Theory Week 9 – Capital Asset Pricing Model Week 10 – Arbitrage Pricing Theory Week 11 – Operation and Efficiency of Capital Markets Week 12 – Course Review – Problem Set #2 Due
George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229
We obtain the growth rate g in the dividend growth model by calculating the geometric average for the last 10 years based on Common DIV/SH.
Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.
This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.
Efficient Market Hypothesis has been controversial issues among researcher for decades. Until now, there is no united conclusion whether capital markets are efficiency or not. In 1960s, Fama (1970) believed that market is very efficient despite there are some trivial contradicted tests. Until recently, both empirical and theatrical efficient market hypothesis was being disputed by behavior finance economist. They have found that investor have psychological biases and found evidences that some stocks outperform other stocks. Moreover, there are evidences prove that market are not efficient for instance financial crisis, stock market bubble, and some investor can earn abnormal return which happening regularly in stock markets all over the world. Therefore, the purpose of this essay is to demonstrate that Efficient Market Hypothesis in stock (capital) markets does not exist in the real world by proofing four outstanding unrealistic conditions that make market efficient: information is widely available and cost-free, investor are rational, independent and unbiased, There is no liquidity problem in stock market, and finally stock prices has no pattern.
Of the firm 's sales, 40 percent are for cash and the remaining 60 percent are on credit. Of credit sales, 40 percent are paid in the month after sale and 30 percent are paid in the second month after the sale. Materials cost 30 percent of sales and are purchased and received each month in an amount sufficient to cover the following month 's expected sales. Materials are paid for in the month after they are received. Labor expense is 40 percent of sales and is paid for in the month of sales. Selling and administrative expense is 5 percent of sales and is also paid in the month of sales. Overhead expense is $28,000 in cash per month.
The dividend policy such as the payment of dividend affects the market price of share. If there is a debate in this issue, this theory is commonly accepted. In this report the relationship between dividend and the market price of share is proved in the banking sector of Bangladesh. But it is also revealed that
Liquidity proportions are the proportions that gauge the capacity of an organization to meet its transient obligation commitments. These proportions measure the capacity of an organization to pay off its fleeting liabilities when they fall due.
Assets come in many forms, differentiating in their liquidity. Liquidity, by definition, is how easy an asset can be traded (Hertrich, 2015). Different assets have different abilities to be traded, cash being the easiest; hence cash is the most liquid asset. This causes price differentiation, where more liquid assets have higher price tags and lower trading costs (Hertrich, 2015). This makes more liquid assets more attractive for investors. When assets have low liquidity there are risks involved for investors because there is a chance that the asset cannot be turned into cash when needed. Liquidity risk calculates the difficulty of selling an asset in return for cash (Currie, 2011). Liquidity risk is associated with low liquidity; hence there is a negative relationship between liquidity and liquidity risk (Hertrich, 2015). This implies that the higher the liquidity risk of the asset, the less the possibility the asset can be traded.