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Turning Over Turnover

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  • Martijn Cremers
  • Jianping Mei
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    Abstract

    This paper applies the methodology of Bai and Ng (2002, 2004) for decomposing large panel data into systematic and idiosyncratic components to both returns and turnover. Combining the methodology with a generalized-least-squares-based principal components procedure, we demonstrate that this approach works well for both returns and turnover despite the presence of severe heteroscedasticity and non-stationarity in turnover of individual stocks. We then test the duo-factor model of Lo and Wang's (2000), which is based on mutual fund separation. Our results indicate that trading due to systematic risk in returns can account for as much as 73% of all systematic turnover variation in the weekly time-series and 76% in

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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm429.

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    Date of creation: 01 Dec 2004
    Date of revision: 01 May 2008
    Handle: RePEc:ysm:somwrk:ysm429

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    2. Chamberlain, Gary & Rothschild, Michael, 1982. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Scholarly Articles 3230355, Harvard University Department of Economics.
    3. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    4. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2000. "Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices," NBER Working Papers 7687, National Bureau of Economic Research, Inc.
    5. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
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    7. Owen Lamont, . "Earnings and Expected Returns," CRSP working papers 345, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    9. Michaely, Roni & Vila, Jean-Luc, 1996. "Trading Volume with Private Valuation: Evidence from the Ex-dividend Day," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 471-509.
    10. Andrew W. Lo & Jiang Wang, 2006. "Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 61(6), pages 2805-2840, December.
    11. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    12. Connor, Gregory & Korajczyk, Robert A., 1988. "Risk and return in an equilibrium APT : Application of a new test methodology," Journal of Financial Economics, Elsevier, vol. 21(2), pages 255-289, September.
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    16. Maureen O'Hara, 2003. "Presidential Address: Liquidity and Price Discovery," Journal of Finance, American Finance Association, vol. 58(4), pages 1335-1354, 08.
    17. Hiemstra, Craig & Jones, Jonathan D, 1994. " Testing for Linear and Nonlinear Granger Causality in the Stock Price-Volume Relation," Journal of Finance, American Finance Association, vol. 49(5), pages 1639-64, December.
    18. Jonathan B. Berk, 2000. "Sorting Out Sorts," Journal of Finance, American Finance Association, vol. 55(1), pages 407-427, 02.
    19. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-91, September.
    20. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
    21. Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04.
    22. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
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