Speculative trading, stock returns and asset pricing anomalies

We propose a novel firm-level measure of speculative trading (SPT) for the Chinese stock market. Based on prior studies identifying differences of opinion as the dominant driver of speculative trading, we isolate the trading volume driven by differences of opinion from total trading volume as the speculative trading measure. We verify that SPT effectively reflects speculative trading and significantly and negatively predicts future returns. More importantly, SPT contains incremental information relative to the other speculative trading proxies. Using SPT, we further find that speculative trading plays a key role in explaining and driving the anomaly returns in the Chinese market.