Dynamic Volume-Return Relation of Individual Stocks
Guillermo Llorente, Roni Michaely, Gideon Saar, Jiang Wang
NBER Working Paper No. 8312
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.
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.