Speculative Trading and Stock Returns

Abstract

Making use of the excessively speculative Chinese stock market, we test the effect of speculative trading on stock returns. We find a significantly negative relationship between abnormal turnover and future returns. In contrast, past average turnover does not predict returns. The effect of abnormal turnover persists after controlling for the Fama-French factors, and it cannot be attributed to liquidity or information shocks. It is also interesting that abnormal turnover absorbs the effect of idiosyncratic volatility on stock returns. These findings are consistent with the notion that speculative trading leads to a speculative component in asset prices.