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Liquidity Commonality and the Risk Premium in the Chinese Metal Futures Market

Tang, Maiqi LU and Feng, Yuyang LU (2025) NEKN02 20251
Department of Economics
Abstract
Our study finds strong liquidity commonality across China's metal futures contracts, as about 47% of liquidity changes in individual contracts can be explained by a market-wide factor during 2019-2025. Liquidity fluctuations also show mean-reverting behavior, meaning they tend to return to normal levels after short-term shocks. Moreover, this co-movement in liquidity remains statistically significant both before and after China’s Zero-COVID policy shift.
The analysis also reveals a statistically significant liquidity risk premium in this market. Less liquid contracts earn higher average returns, indicating that investors demand extra compensation for illiquidity. This result is robust when using the raw Amihud illiquidity measure, but the... (More)
Our study finds strong liquidity commonality across China's metal futures contracts, as about 47% of liquidity changes in individual contracts can be explained by a market-wide factor during 2019-2025. Liquidity fluctuations also show mean-reverting behavior, meaning they tend to return to normal levels after short-term shocks. Moreover, this co-movement in liquidity remains statistically significant both before and after China’s Zero-COVID policy shift.
The analysis also reveals a statistically significant liquidity risk premium in this market. Less liquid contracts earn higher average returns, indicating that investors demand extra compensation for illiquidity. This result is robust when using the raw Amihud illiquidity measure, but the effect becomes much weaker and loses significance when the liquidity measure is log-transformed. These findings emphasize that liquidity risk is priced in Chinese metal futures while highlighting how the choice of liquidity metric can influence the observed premium. (Less)
Please use this url to cite or link to this publication:
author
Tang, Maiqi LU and Feng, Yuyang LU
supervisor
organization
course
NEKN02 20251
year
type
H1 - Master's Degree (One Year)
subject
keywords
Liquidity Commonality, Risk Premium, Amihud Illiquidity, Chinese Futures Market, Panel Regression
language
English
id
9194278
date added to LUP
2025-09-12 10:44:15
date last changed
2025-09-12 10:44:15
@misc{9194278,
  abstract     = {{Our study finds strong liquidity commonality across China's metal futures contracts, as about 47% of liquidity changes in individual contracts can be explained by a market-wide factor during 2019-2025. Liquidity fluctuations also show mean-reverting behavior, meaning they tend to return to normal levels after short-term shocks. Moreover, this co-movement in liquidity remains statistically significant both before and after China’s Zero-COVID policy shift.
The analysis also reveals a statistically significant liquidity risk premium in this market. Less liquid contracts earn higher average returns, indicating that investors demand extra compensation for illiquidity. This result is robust when using the raw Amihud illiquidity measure, but the effect becomes much weaker and loses significance when the liquidity measure is log-transformed. These findings emphasize that liquidity risk is priced in Chinese metal futures while highlighting how the choice of liquidity metric can influence the observed premium.}},
  author       = {{Tang, Maiqi and Feng, Yuyang}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Liquidity Commonality and the Risk Premium in the Chinese Metal Futures Market}},
  year         = {{2025}},
}