RFS Advance Access originally published online on August 27, 2007
Review of Financial Studies 2007 20(6):1749-1782; doi:10.1093/rfs/hhm038
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Turning over Turnover
Yale School of Management
Stern School of Business, New York University, and CKGSB
Address correspondence to K. J. Martijn Cremers, International Center for Finance, Yale School of Management, 135 Prospect Street, New Haven, CT 6520, or e-mail: martijn.cremers{at}yale.edu
JEL: G12
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Abstract |
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This article applies the methodology of Bai and Ng (2002, 2004) for decomposing panel data into systematic and idiosyncratic components to both stock returns and turnover panels. This approach works well for both returns and turnover, despite the presence of severe heteroscedasticity and nonstationarity of individual stocks' turnover. We test the mutual fund separation model of Lo and Wang (2000). Trading due to systematic risk in returns can account for 66% of systematic turnover. Thus, portfolio rebalancing due to systematic risk is a very important motive for stock trading. Finally, several common turnover measures may understate the impact of stock trading.
This article originally was titled "A New Approach to the Duo-factor model of Return and Volume". We would like to thank Andrew Ang, KC Chan, Kalok Chan, Lewis Chan, Robert Engel, Larry Harris, Campbell Harvey (the editor), Joel Hasbrouck, Anthony Lynch, Gideon Saar, Jeff Wurgler, Wei Xiong, Yexiao Xu and two anonymous referees, as well as seminar participants at NYU, HKUST, Rutgers University, USC, and AFA 2005 meetings for helpful discussions. We thank Dasol Kim and Haibo Tang for excellent research assistance. We also thank Andrew Lo and Jiang Wang, who graciously provided us with their Mini-CRSP data manual.