Empirical Study On Interrelation Of Turnover Rate And Yield

Is there a certain correlation between turnover rate and yield? If it is, what is this correlation? Can we observe the turnover rate to assist investment in stock market? These are the key objects of this thesis. It is concluded in most of prior researches that the turnover rate and yield are negatively related. The two main reasons to explain the negative relationship are as follows:one is liquidity premium and the other is speculative bubble. In prior researches, turnover rate is regressed on itself with a lag of one period. In this thesis, turnover rate and abnormal returns are selected from the same accounting year. Although turnover rate is a leading indicator, it only affects returns in following days. Thus month data of turnover rate cannot be used to forecast return. The prospective of this thesis is to find a positive relation between them in the same accounting year.To do so, this paper will be divided into two periods to be tested:the first day of listing and days after listing. On the first day of listing, there is no price limitation, which always causes turnover rate extremely high as IPO always leads a price much higher than issuing price. As for the stocks with a close price lower than issuing price ('breaking stock'), investors will continue to hold them to expect the price to rise above issuing price. In this thesis, no breaking stock is included. As a result of investors'over-confidence, the price of a stock includes two parts: one is the earnings growth of the underlying company and the other is the bubbles made by investors. When the price deviates much from its value, some investors will sell out the stocks while others buy more to expect an even higher price. Thus, there would be a high turnover rate and return. The data excludes stocks in finance industries and selects stocks eligible for margin purchases and short sales with no limitation. This thesis has four hypothesis:a. whether short-selling restrictions exist does no significant effect on turnover return; b. turnover rate has no strong relations with other liquidity indicators; c. turnover rate and return have a positive relationship on the first day of listing; d. turnover rate is positively related with abnormal return on days after listing. For testing last hypothesis, utility model is employed with dependent variable of abnormal return, independent variable of daily turnover rate and control variables of P/E ratio, book value/fair value ratio, common stock values and earning per share. In addition, the author added more control variables:gross domestic product, consumer price index, the weighted average interbank interest rate, growth rate of broad money supply. At the same time, the year with no short limitation is added as dummy variable.The result of the model indicates that relations between abnormal return and daily turnover rate, P/E ratio, earning per share, common stock values, and consumer price index are respectively positive, negative, positive, positive, positive, which is consistent with our hypothesis. Also, we included some empirical explanation in this thesis. However, as the data are all from Shanghai and Shenzhen A-shares and are most heavily weighted, we cannot conclude that valuable stocks yields higher than growth stocks according to the negative relation between P/E ratio and abnormal return. So, the results of prior researches cannot be rejected.