Can turnover rate predict stock return in Korean stock market?

Abstract

We investigate whether a trading strategy using the stock turnover rate as an indicator can generate a return on the Korean stock market. Firstly, we utilized the famous technical analyses, the Bollinger Bands trading strategy and the golden cross & death cross trading strategy. Then, we proposed the distance between short term and long term moving averages of turnover rate (MATD) and proceeded to construct a portfolio based on monthly rebalancing. The Bollinger Bands and moving average strategies yielded better returns than when using the usual stock price as the indicator, but they were not significant when tested for predictability and profitability. On the other hand, the portfolio construction strategy using MATD showed the cross section of a negative relationship with the returns of the Korean stock market. Moreover, we constructed an L-H hedge portfolio, and a strong correlation appeared even after adjusting the returns with widely known factors. This relationship can be regarded as a premium for illiquidity risk. Key words : stock turnover rate, Bollinger Bands, Golden and death cross, MAVD, MATD