FIN-03-025 |
NYU Stern School of Business |
September 2003
K.J. Martijn Cremers and Jianping Mei
ABSTRACT
The methodology of Bai and Ng (2002, 2003) for decomposing large panel data into
systematic and idiosyncratic components is applied to both returns and turnover. Combining
this with a GLS-based principal components approach, we demonsate that their procedure
works well for both returns and turnover despite the presence of severe heteroscedasticity
and non-stationarity in turnover of individual stocks. We then test Lo and Wang’s (2000)
theoretical model’s resiction that returns and turnover should have the same number of
systematic factors. This is songly rejected by the data, suggesting stock price and ading
volume may not be compatible under the existing multi-factor asset pricing-ading
framework. We also demonsate that several commonly used turnover measures may
understate the price impact of stock ading.
K.J. Martijn Cremers
Institution: International Center for Finance, Yale School of Management
135 Prospect Seet, New Haven, CT 06520
Email: martijn.cremers@yale.edu
Phone: (203) 436-0649
Jianping Mei
Institution: Stern School of Business, New York University, 44th West 4th Seet, New York, NY 10012
Telephone: (212) 998-0354
Fax: (212) 995-4221
Email: jmei@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~jmei
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