Speculative Trading and Stock Returns*

Using data from Chinese stock markets, we examine the effect of speculative trading on stock returns. We develop a volume-related variable, abnormal turnover ratio (ATR), by isolating speculative trading from liquidity and other components in trading volume. After a group of tests verifying that ATR indeed represents speculative trading, we show that ATR negatively predicts future stock returns. The average monthly return spread between the top and bottom ATR deciles is -1.87%, suggesting a highly significant negative ATR premium. The return predictability of ATR survives after controlling for common risk factors and event-driven information shocks. These findings indicate that speculative trading affects asset prices.