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| Trading Turnover and Expected Stock Returns: The Trading Frequency Hypothesis and Evidence from the Tokyo Stock Exchange by Shing-yang Hu of National Taiwan University & University of Chicago January 1997 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. Books Referenced in this paper: (what is this?)
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