Trading Volume and Time Varying Betas

Abstract

I show that increased turnover accompanies changes in stocks' risk exposures. A one standard deviation decrease in a stock's market beta increases turnover as much as 25%. The sensitivity of turnover to beta changes has grown over time. Market beta changes explain as much as 5% of the monthly cross-sectional variation in turnover. VAR decompositions of returns show turnover is more strongly associated with discount rate news than cash flow news. This mechanism provides a new channel for turnover combined with realized returns to predict long horizon returns and cash flow changes. Further this mechanism can amplify many prior explored motives for trade.

Keywords: Trade, Trading Volume, Turnover, Time Varying Betas, Conditional Betas, Return Predictability, Dividend Predictability

JEL Classification: G10, G11, G12