Predictability of Stock Market Returns Based on Trading Turnover: Evidence From The Chinese Market
DOI:
https://doi.org/10.62051/87efa781Keywords:
Stock return predictability; Good turnover; Bad turnover; Asset allocation.Abstract
Trading turnover serves as a critical indicator of market activity. This study conducts an empirical analysis using monthly returns of the Shanghai Stock Exchange Composite Index and market turnover data from January 2000 to December 2022. By decomposing market turnover into "good turnover" and "bad turnover," we investigate the relationship between different turnover components and equity returns. The findings indicate that both total market turnover and good turnover significantly predict stock market returns both in-sample and out-of-sample, with good turnover exhibiting superior predictive power. Furthermore, good turnover provides incremental information beyond that captured by total market turnover and bad turnover. Practical asset allocation tests demonstrate that strategies based on good turnover forecasts outperform those utilizing total or bad turnover.
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