Systematic Risk and Share Turnover

49 Pages Posted: 27 Mar 2015 Last revised: 6 May 2015

See all articles by Maria Kasch

Maria Kasch

University of Mannheim - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 2, 2015

Abstract

I show that the stocks’ contribution to market volatility increases uniformly with their share turnover. The source of this relation is the market force driving the persistence of cross-sectional variation in turnover, namely the rate of investor participation in a stock. A higher rate of participation generates a persistent pattern of relative overreaction to common shocks, resulting in a large cross-sectional dispersion in market beta at both short and long return horizons. This mechanism (i) sheds light on the source of excess market volatility, (ii) introduces a strong mechanical element into the beta-return relation, challenging the traditional interpretation of this relation and the meaningfulness of the existing tests of the CAPM, and (iii) suggests that the low-beta anomaly (Black et al., 1972) reflects a reversal of the beta-driven overreaction in the cross-section of stock returns.

Keywords: Market volatility; Short- and long-horizon betas; Parallel response to common shocks; Crowded-trade problem; Mechanical risk-return relation; Stylized empirical fact

JEL Classification: G12

Suggested Citation

Kasch, Maria, Systematic Risk and Share Turnover (May 2, 2015). Available at SSRN: https://ssrn.com/abstract=2584972 or http://dx.doi.org/10.2139/ssrn.2584972

Maria Kasch (Contact Author)

University of Mannheim - Department of Finance ( email )

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Mannheim, 68161
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