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Trading volume, anomaly returns and noise trader risk in China

Author

Listed:
  • Han, Chunmao
  • Zhang, Wei

Abstract

We document trading volume's amplification effect on trading friction anomalies in the Chinese market. Unlike the uncertain role in different situations in the U.S. market, trading volume in the Chinese market represents noise trading activity/sentiment, rather than efficiency. At the market level, anomaly returns are higher during periods of higher trading activity; at the individual stock level, anomalies constructed by high-turnover stocks have higher returns. We use noise trader risk to explain the contradiction whereby trading volume does not promote efficiency in the retail investor-dominated Chinese market. Further, we propose a volume-weighted portfolio to utilize trading volume's amplification effect and liquidity property. It produces high returns with low transaction costs.

Suggested Citation

  • Han, Chunmao & Zhang, Wei, 2024. "Trading volume, anomaly returns and noise trader risk in China," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:pacfin:v:84:y:2024:i:c:s0927538x24000325
    DOI: 10.1016/j.pacfin.2024.102281
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    More about this item

    Keywords

    Trading volume; Anomalies; Portfolios; Noise trader risk; Volume-weighted; Mispricing; China;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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