Question

How return volatility is associated with turnover?

Answer 1

Volatility is the variability in the returns either from a security or from a stock market index. Its considered as a measure for dispersion of returns. Stock market is always works on the basis of risk. Risk indicates the variability in returns. We can say when the stock market rises or falls more than one percentage over a sustained period of time, its a volatile market. In stock market volatility can be measured in terms of Standard Deviation or variance.

Share Turnover compares the volume of shares traded over a period of time with the number of shares outstanding. If the turnover is high, it indicates that investors are having an easier time for buying and selling of shares. Share turnover can be calculated by dividing the total number of shares traded during the measurement period by average number of shares available during the period for sale. For a low share turn over rate indicates that it may take time to sell off a share holding, during which the time shares may decline in value. Consequently many investors become unwilling to put their money at risk by acquiring the shares of company having low turnover rate. Small businesses always have low turn over rate since their market capitalization is low.

The stock market returns's volatility and turnover(trading volume) is related. It has been analysed by many researchers. The number of transactions is measure of volume of trade and there is a positive correlation between changes in volume and changes in squared returns of stocks. The studies indicate the evidence of contemporaneous correlation between absolute price changes and trading volume. Therefore we can say that return volatility is associated with the turnover.