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Speculative Trading and Stock Returns

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  • Li Pan
  • Ya Tang
  • Jianguo Xu

Abstract

Using data from Chinese stock markets, we examine the effect of speculative trading on stock returns. We develop a volume-related variable, abnormal turnover ratio (ATR), by isolating speculative trading from liquidity and other components in trading volume. After a group of tests verifying that ATR indeed represents speculative trading, we show that ATR negatively predicts future stock returns. The average monthly return spread between the top and bottom ATR deciles is −1.87%, suggesting a highly significant negative ATR premium. The return predictability of ATR survives after controlling for common risk factors and event-driven information shocks. These findings indicate that speculative trading affects asset prices.

Suggested Citation

  • Li Pan & Ya Tang & Jianguo Xu, 2016. "Speculative Trading and Stock Returns," Review of Finance, European Finance Association, vol. 20(5), pages 1835-1865.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:5:p:1835-1865.
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    References listed on IDEAS

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    1. Jianping Mei & Jose A. Scheinkman & Wei Xiong, 2009. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 225-255, November.
    2. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
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    Cited by:

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