Dynamic Volume-Return Relation of Individual Stocks

Abstract

We examine the dynamic relation between return and volume of individual stocks. Using a simple model in which investors trade to share risk or speculate on private information, we show that returns generated by risk-sharing trades tend to reverse themselves, while returns generated by speculative trades tend to continue themselves. We test this theoretical prediction by analyzing the relation between daily volume and first-order return autocorrelation for individual stocks listed on the NYSE and AMEX. We find that the cross-sectional variation in the relation between volume and return autocorrelation is related to the extent of informed trading in a manner consistent with the theoretical prediction.

Cite this

Guillermo Llorente, Roni Michaely, Gideon Saar, Jiang Wang (2002). Dynamic Volume-Return Relation of Individual Stocks. Review of Financial Studies. https://doi.org/10.1093/rfs/15.4.1005

@article{guillermo2002dynamic,
  title  = {Dynamic Volume-Return Relation of Individual Stocks},
  author = {Llorente, Guillermo and Michaely, Roni and Saar, Gideon and Wang, Jiang},
  year   = {2002},
  journal = {Review of Financial Studies},
  doi    = {10.1093/rfs/15.4.1005}
}

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