Trading Activity and Expected Stock Returns
Emory University - Department of Finance
University of California, Los Angeles (UCLA) - Finance Area
V. Ravi Anshuman
Indian Institute of Management Bangalore
Given the evidence that the level of liquidity affects asset returns, a reasonable hypothesis is that the second moment of liquidity should be positively related to asset returns, provided agents care about the risk associated with fluctuations in liquidity. Motivated by this observation, we analyze the relation between expected equity returns and the level as well as the volatility of trading activity (a proxy for liquidity). We document a result contrary to our initial hypothesis, namely, a negative and surprisingly strong cross-sectional relationship between stock returns and the variability of dollar trading volume and share turnover, after controlling for size, book-to-market, momentum, and the level of dollar volume or share turnover. This effect survives a number of robustness checks and is statistically and economically significant. Our analysis demonstrates the importance of trading activity-related variables in the cross-section of expected stock returns.
Number of Pages in PDF File: 43
JEL Classification: G12, G14working papers series
Date posted: July 5, 2000
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 0.532 seconds