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

Shing-yang Hu
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Shing-yang Hu: National Taiwan University & University of Chicago

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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.

Keywords: turnover; expected return; transaction cost; Japan; liquidity (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 1997-02-13
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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