Working Paper: NBER ID: w10719
Authors: John M. Griffin; Federico Nardari; Ren M. Stulz
Abstract: This paper investigates the dynamic relation between market-wide trading activity and returns in 46 markets. Many stock markets exhibit a strong positive relation between turnover and past returns. These findings stand up in the face of various controls for volatility, alternative definitions for turnover, and differing sample periods, and are present at both the weekly and daily frequency. However, the magnitude of this relation varies widely across markets. Several competing explanations are examined by linking cross-country variables to the magnitude of the relation. The relation between returns and turnover is stronger in countries with restrictions on short sales and where stocks are highly cross-correlated; it is also stronger among individual investors than among foreign or institutional investors. In developed economies, turnover follows past returns more strongly in the 1980s than in the 1990s. The evidence is consistent with models of costly stock market participation in which investors infer that their participation is more advantageous following higher stock returns.
Keywords: No keywords provided
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive shock to market returns (G17) | Increase in trading volume (turnover) (G15) |
| Positive shock to market returns (G17) | Increase in trading volume (turnover) after ten weeks (G15) |
| Positive shock to market returns (G17) | Increase in trading volume (turnover) in developing markets (G15) |
| Positive shock to market returns (G17) | Increase in trading volume (turnover) in high-income countries (F69) |
| Return-turnover relation is positive and significant in many markets (G14) | Varies widely (Q59) |
| Return-turnover relation (J63) | Stronger among individual investors than institutional investors (G40) |
| Absence of return-turnover relation in advanced markets during 1993-2003 (G14) | Compared to 1983-1992 period (E65) |
| Positive vs negative return shocks (E32) | Asymmetries in response (C22) |