The rise of automated trading systems has made stock trading more accessible and convenient, reducing the link between traditional illiquidity measures and stock returns. However, empirical data in China’s stock market shows conflicting results. We find a significantly positive correlation between intraday illiquidity and future returns in China’s stock market. We offer that the pricing ability of this intraday illiquidity originates from the correlation between trading activity and intraday return. This finding provides compelling out-of-sample evidence for the debate regarding the pricing of the Amihud (2002) measure in the U.S. market. Additionally, we create an intradayreturn illiquidity factor that outperforms Liu, Stambaugh, and Yuan (2019) sentiment factors in China’s stock market.

In this paper, using data for the period January 1995 to May 2009 for the Shanghai stock exchange (SHSE), we show that aggregate illiquidity is a priced risk factor. We develop the relationship between the illiquidity factor, asymmetric information, and market collapse. Our empirical results show that while the illiquidity factor is a source of asymmetric information on the SHSE, asymmetric information does not trigger a market collapse.