TY  - JOUR
AU  - Lo,Andrew W.
AU  - Wang,Jiang
TI  - Trading Volume: Implications of An Intertemporal Capital Asset Pricing Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8565
PY  - 2001
Y2  - October 2001
UR  - http://www.nber.org/papers/w8565
L1  - http://www.nber.org/papers/w8565.pdf
N1  - Author contact info:
Andrew W. Lo
MIT Sloan School of Management
100 Main Street, E62-618
Cambridge, MA  02142
Tel: 617/253-0920
Fax: 781/891-9783
E-Mail: alo@mit.edu

Jiang Wang
MIT Sloan School of Management
100 Main Street, E62-614
Cambridge, MA 02142
Tel: 617/253-2632
Fax: 617/258-6855
E-Mail: wangj@mit.edu
AB  - We derive an intertemporal capital asset pricing model with multiple assets and heterogeneous investors, and explore its implications for the behavior of trading volume and asset returns. Assets contain two types of risks: market risk and the risk of changing market conditions. We show that investors trade only in two portfolios: the market portfolio, and a hedging portfolio, which allows them to hedge the dynamic risk. This implies that trading volume of individual assets exhibit a two-factor structure, and their factor loadings depend on their weights in the hedging portfolio. This allows us to empirically identify the hedging portfolio using volume data. We then test the two properties of the hedging portfolio: its return provides the best predictor of future market returns and its return together with the return of the market portfolio are the two risk factors determining the cross-section of asset returns.
ER  -