Why Does Higher Variability of Trading Activity Predict Lower Expected Returns?
51 Pages Posted: 1 Sep 2010 Last revised: 29 Sep 2015
Date Written: May 2015
The paper shows that controlling for the aggregate volatility risk factor eliminates the puzzling negative relation between variability of trading activity and future abnormal returns. I also find that variability of other measures of liquidity and liquidity risk is largely unrelated to expected returns. Lastly, I show that the low returns to the firms with high variability of trading activity are not explained by liquidity risk and mispricing theories.
Keywords: liquidity, uncertainty, liquidity variability, turnover, trading volume, aggregate volatility risk
JEL Classification: G12, G13, E44
Suggested Citation: Suggested Citation