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Trading Turnover and Expected Stock Returns: The Trading Frequency Hypothesis and Evidence from the Tokyo Stock Exchange

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  • Shing-yang Hu

    (National Taiwan University & University of Chicago)

Abstract

This paper tries to find a widely accessible measure of liquidity and studies its impact on asset pricing. Using trading turnover as a measure of liquidity and the 1976-1993 Tokyo Stock Exchange data, I find that, cross-sectionally, stocks with higher turnover tend to have a lower expected return. This evidence is consistent with predictions derived from an Amihud-Mendelson type of transaction cost model in which the turnover measures investors’ trading frequency. The trading frequency hypothesis also predicts that the cross-sectional expected return is a concave function of the turnover and the time-series expected return is an increasing function of the turnover. The Japanese data supports both predictions.

Suggested Citation

  • Shing-yang Hu, 1997. "Trading Turnover and Expected Stock Returns: The Trading Frequency Hypothesis and Evidence from the Tokyo Stock Exchange," Finance 9702001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9702001
    Note: Type of Document - Word (PC); prepared on PC; to print on CANON BJC-4200; pages: 29 ; figures: included. Word for Windows document submitted via ftp
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    Cited by:

    1. Huang, Roger D. & Masulis, Ronald W., 2003. "Trading activity and stock price volatility: evidence from the London Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 249-269, May.
    2. Vo, Xuan Vinh & Batten, Jonathan, 2010. "An Empirical Investigation of Liquidity and Stock Returns Relationship in Vietnam Stock Markets during Financial Crisis," MPRA Paper 29862, University Library of Munich, Germany, revised 10 Jan 2011.
    3. Doron Avramov & Guy Kaplanski & Avanidhar Subrahmanyam, 2022. "Postfundamentals Price Drift in Capital Markets: A Regression Regularization Perspective," Management Science, INFORMS, vol. 68(10), pages 7658-7681, October.
    4. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, vol. 140(1), pages 66-96, May.
    5. Randi Næs & Bernt Arne Ødegaard, 2008. "Liquidity and asset pricing: Evidence on the role of investor holding period," Working Paper 2007/11, Norges Bank.
    6. Choi, Jaehyung & Kim, Young Shin & Mitov, Ivan, 2015. "Reward-risk momentum strategies using classical tempered stable distribution," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 194-213.
    7. Jaehyung Choi, 2014. "Maximum drawdown, recovery, and momentum," Papers 1403.8125, arXiv.org, revised Sep 2021.
    8. Ran Lu-Andrews & John L. Glascock, 2017. "Liquidity, Price Behavior, and Market-related Events," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(2), pages 318-351, March.
    9. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    10. Adam Zaremba & Rados³aw ¯mudziñski, 2014. "The Low Price Effect On The Polish Market," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 10(1), pages 69-85, June.
    11. Bajzik, Josef, 2021. "Trading volume and stock returns: A meta-analysis," International Review of Financial Analysis, Elsevier, vol. 78(C).
    12. Lischewski, Judith & Voronkova, Svitlana, 2012. "Size, value and liquidity. Do They Really Matter on an Emerging Stock Market?," Emerging Markets Review, Elsevier, vol. 13(1), pages 8-25.
    13. Jaehyung Choi & Young Shin Kim & Ivan Mitov, 2014. "Reward-risk momentum strategies using classical tempered stable distribution," Papers 1403.6093, arXiv.org, revised Jun 2015.
    14. Alzahrani, Ahmed A. & Gregoriou, Andros & Hudson, Robert, 2013. "Price impact of block trades in the Saudi stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 322-341.
    15. Jaehyung Choi & Sungsoo Choi & Wonseok Kang, 2012. "Momentum universe shrinkage effect in price momentum," Papers 1211.6517, arXiv.org.
    16. Jensen, Gerald R. & Moorman, Theodore, 2010. "Inter-temporal variation in the illiquidity premium," Journal of Financial Economics, Elsevier, vol. 98(2), pages 338-358, November.
    17. Choi, Jaehyung, 2014. "Physical approach to price momentum and its application to momentum strategy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 61-72.
    18. Pei-Fen Chen & Jhih-Hong Zeng & Chien-Chiang Lee, 2015. "Monetary Policy and the Diversification–Profitability Linkage in Banking: Evidences from Emerging Market Economies," South African Journal of Economics, Economic Society of South Africa, vol. 83(4), pages 576-597, December.
    19. K. Rouwenhorst, 1998. "Local Return Factors and Turnover in Emerging Stock Markets," Yale School of Management Working Papers ysm97, Yale School of Management, revised 01 Mar 2001.
    20. Chen, Pei-Fen & Zeng, Jhih-Hong, 2014. "Asymmetric effects of households’ financial participation on banking diversification," Journal of Financial Stability, Elsevier, vol. 13(C), pages 18-29.
    21. Datar, Vinay T. & Y. Naik, Narayan & Radcliffe, Robert, 1998. "Liquidity and stock returns: An alternative test," Journal of Financial Markets, Elsevier, vol. 1(2), pages 203-219, August.
    22. Kairys, Joseph Jr. & Kruza, Raimonds & Kumpins, Ritvars, 2000. "Winners and losers from the introduction of continuous variable price trading: Evidence from the Riga Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 24(4), pages 603-624, April.
    23. repec:fau:fauart:v:65:y:2015:i:1:p:84-104 is not listed on IDEAS
    24. Patrick Dennis, 2003. "Stock Splits and Liquidity: The Case of the Nasdaq‐100 Index Tracking Stock," The Financial Review, Eastern Finance Association, vol. 38(3), pages 415-433, August.
    25. Hansi Hu & Terry Walter, 2023. "Dividend imputation taxes and the curious case of a price premium between BHP and Billiton American depositary receipts," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 691-717, March.

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    More about this item

    Keywords

    turnover; expected return; transaction cost; Japan; liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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