The Cross-Section of Expected Trading Activity

This paper studies cross-sectional variations in stock trading activity for a comprehensive sample of NYSE/AMEX and Nasdaq stocks over a period of thirty-six years. Our theoretical framework indicates that trading activity depends on the extent of liquidity trading, the mass of informed agents, and dispersion of opinion about the stock's fundamental value. We further postulate that liquidity or noise trading depends both on a stock's visibility and on portfolio rebalancing needs triggered by past stock price performance. We use size, firm age, price, and the book-to-market ratio as proxies for a firm's visibility. The mass of informed agents is proxied by the number of analysts following the stock, while analyst forecast dispersion, systematic risk, and firm leverage proxy for divergence of opinion. Past return is by far the most significant predictor of stock turnover. Forecast dispersion and systematic risk also play important roles in predicting the cross-section of expected trading activity. Stocks that have performed well in a given year experience aggressive buying pressure in the subsequent year, which points to the presence of momentum investing. Overall, the results support theories of trading based on differences of opinion and stock visibility