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Dynamic Volume-Return Relation of Individual Stocks

Author

Listed:
  • Guillermo Llorente
  • Roni Michaely
  • Gideon Saar
  • Jiang Wang

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.

Suggested Citation

  • Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2001. "Dynamic Volume-Return Relation of Individual Stocks," NBER Working Papers 8312, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8312
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    References listed on IDEAS

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