NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Dynamic Volume-Return Relation of Individual Stocks

Guillermo Llorente, Roni Michaely, Gideon Saar, Jiang Wang

NBER Working Paper No. 8312
Issued in May 2001
NBER Program(s):   AP

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.

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Published: Llorente, G., R. Michaely, G. Saar and J. Wang. "Dynamic Volume-Return Relation Of Individual Stocks," Review of Financial Studies, 2002, v15(4), 1005-1047.

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