Liquidity in Up and Down Markets for Asset Pricing: Evidence from the Taiwan Stock Market

다국어 초록 (Multilingual Abstract)

Using a sample of stocks listed on the Taiwan Stock Exchange during 1991–2014, this study investigates the liquidity in up and down markets, which is important for understanding asset pricing. Firm-level original Amihud, Journal of Financial Markets, 5, 2002, 31. illiquidity is decomposed into two half-Amihud measures for up- and down-market days. First, we show that the ability of the down-market liquidity level to explain the cross-section of returns subsumes the up-market liquidity level. Second, only loadings on systematic down-market liquidity factors are significantly priced. Third, a liquidity risk factor constructed by the downmarket component, rather than the up-market component significantly explains the time-series and cross-sectional variation in returns sorted by firm size, suggesting that the liquidity risk factor associated with down-market days performs better in capturing the flight-toliquidity. Overall, the findings support the view that the liquidity in down markets plays a more important role in asset pricing than the liquidity in up markets.

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