Author(s): Tarun Chordia, Avanidhar Subrahmanyam, V. Ravi Anshuman
Abstract: Given the evidence that the level of liquidity a!ects asset returns, a reasonable hypothesis is that the second moment of liquidity should be positively related to asset returns, provided agents care about the risk associated with #uctuations in liquidity. Motivated by this observation, we analyze the relation between expected equity returns and the level as well as the volatility of trading activity, a proxy for liquidity. We document a result contrary to our initial hypothesis, namely, a negative and surprisingly strong cross-sectional relationship between stock returns and the variability of dollar trading volume and share turnover, after controlling for size, book-to-market ratio, momentum, and the level of dollar volume or share turnover. This e!ect survives a number of robustness checks, and is statistically and economically signi"cant. Our analysis demonstrates the importance of trading activity-related variables in the crosssection of expected stock returns.
Keywords: Asset pricing; Anomalies; Liquidity
