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Arbitrage risk and the turnover anomaly

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  • Chou, Pin-Huang
  • Huang, Tsung-Yu
  • Yang, Hung-Jeh

Abstract

A strong turnover premium exists such that stocks with lower turnover have higher future returns in the 5years following their formation than those with higher turnover. This turnover premium cannot be explained by existing asset-pricing models, a risk-based liquidity factor, or anomalies such as size, book-to-market ratio, or momentum. Further analysis indicates that the turnover premium is greater for stocks with higher idiosyncratic volatility, higher transaction costs, lower institutional ownership, and lower investor sophistication, which implies it is consistent with the mispricing explanation based on arbitrage risk.

Suggested Citation

  • Chou, Pin-Huang & Huang, Tsung-Yu & Yang, Hung-Jeh, 2013. "Arbitrage risk and the turnover anomaly," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4172-4182.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4172-4182
    DOI: 10.1016/j.jbankfin.2013.07.011
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    4. Lin, Yu En & Chu, Chien Chi & Omura, Akihiro & Li, Bin & Roca, Eduardo, 2020. "Arbitrage risk and the cross-section of stock returns: Evidence from China," Emerging Markets Review, Elsevier, vol. 43(C).
    5. DeLisle, R. Jared & McTier, Brian C. & Smedema, Adam R., 2016. "Systematic limited arbitrage and the cross-section of stock returns: Evidence from exchange traded funds," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 118-136.
    6. Han, Xing & Li, Kai & Li, Youwei, 2020. "Investor overconfidence and the security market line: New evidence from China," Journal of Economic Dynamics and Control, Elsevier, vol. 117(C).
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    9. Kelley Bergsma & Vivien Csapi & Dean Diavatopoulos & Andy Fodor, 2020. "Show me the money: Option moneyness concentration and future stock returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(5), pages 761-775, May.

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    More about this item

    Keywords

    Turnover; Asset-pricing anomaly; Arbitrage risk; Investor sophistication; Differences of opinion;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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