Turnover and Return in Global Stock Markets: A Time Series and Cross Sectional Analysis

I study the liquidity of global stock exchanges and how it determines cross sectional returns on stock portfolios of the exchanges. I measure liquidity by turnover ratio computed as value of shares traded over the market capitalization. I obtain data from FIBV, an association of global stock exchanges and conduct a univariate analysis of turnover ratio. I find evidence that liquidity is trend weakly stationary for most stock exchanges, however, exchange and time specific factors are more appropriate for modeling liquidity. In a multivariate regression model, I find age, size, type of exchange, competition for order flow, and growth rate to be significant determinants of liquidity. The exchange specific factors are surrogates for the legal systems, English common law, and Civil laws of the countries. I estimate the parameters of a multiple regression model in a two stage GLS framework in which index return is a function of turnover. The significant determinants of index return are size, turnover, and volatility, although some of the volatility effect may be a spillover from a January effect. Investors expect higher return from high turnover markets. The turnover return relation is found to be true only in emerging markets and not in developed markets. This result confirms existing empirical evidence that high turnover stock portfolios generate superior returns.