Turning Over Turnover
University of Notre Dame
New York University (NYU) - Department of Finance
NYU Working Paper No. FIN-03-025
The methodology of Bai and Ng (2002, 2003) for decomposing large panel data into systematic and idiosyncratic components is applied to both returns and turnover. Combining this with a GLS-based principal components approach, we demonstrate that their procedure works well for both returns and turnover despite the presence of severe heteroscedasticity and non-stationarity in turnover of individual stocks. We then test Lo and Wang's (2000) theoretical model's restriction that returns and turnover should have the same number of systematic factors. This is songly rejected by the data, suggesting stock price and trading volume may not be compatible under the existing multi-factor asset pricing-trading framework. We also demonsate that several commonly used turnover measures may understate the price impact of stock trading.
Number of Pages in PDF File: 43working papers series
Date posted: November 11, 2008
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