NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory

Andrew W. Lo, Jiang W. Wang

NBER Working Paper No. 7625
Issued in March 2000
NBER Program(s):   AP

We examine the implications of portfolio theory for the cross-sectional behavior of equity trading volume. Two-fund separation theorems suggest a natural definition for trading activity: share turnover. If two-fund separation holds, share turnover must be identical for all securities. If (K+1)-fund separation holds, we show that turnover satisfies an approximately linear K-factor structure. These implications are examined empirically using individual weekly turnover data for NYSE and AMEX securities from 1962 to 1996. We find strong evidence against two-fund separation, and a principal-components decomposition suggests that turnover is well approximated by a two-factor linear model.

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Published: Lo, A. W. and J. Wang. "Trading Volume: Definitions, Data Analysis, And Implications Of Portfolio Theory," Review of Financial Studies, 2000, v13(2,Summer), 257-300.

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