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Trading Volume and Serial Correlation in Stock Returns

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  • John Y. Campbell
  • Sanford J. Grossman
  • Jiang Wang

Abstract

This paper investigates the relationship between stock market trading volume and the autocorrelations of daily stock index returns. The paper finds that stock return autocorrelations tend to decline with trading volume. The paper explains this phenomenon using a model in which risk-averse "market makers" accommodate buying or selling pressure from "liquidity" or "non-informational" traders. Changing expected stock returns reward market makers for playing this role. The model implies that a stock price decline on a high-volume day is more likely than a stock price decline on a low-volume day to be associated with an increase in the expected stock return.

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File URL: http://www.nber.org/papers/w4193.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4193.

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Date of creation: Oct 1992
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Publication status: published as Quarterly Journal of Economics, vol cviii (4), November 1993, pp. 905-939
Handle: RePEc:nbr:nberwo:4193

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  1. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 22(01), pages 109-126, March.
  2. Andrew W. Lo & A. Craig MacKinlay, 1991. "An Econometric Analysis of Nonsynchronous Trading," NBER Working Papers 2960, National Bureau of Economic Research, Inc.
  3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(4), pages 703-38, August.
  4. Sanford J. Grossman & Merton H. Miller, 1988. "Liquidity and Market Structure," NBER Working Papers 2641, National Bureau of Economic Research, Inc.
  5. Campbell, John Y. & Hentschel, Ludger, 1992. "No news is good news *1: An asymmetric model of changing volatility in stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 31(3), pages 281-318, June.
  6. De Long, J Bradford, et al, 1989. " The Size and Incidence of the Losses from Noise Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 44(3), pages 681-96, July.
  7. Lamoureux, Christopher G & Lastrapes, William D, 1990. " Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects," Journal of Finance, American Finance Association, American Finance Association, vol. 45(1), pages 221-29, March.
  8. Campbell, John Y & Kyle, Albert S, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(1), pages 1-34, January.
  9. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. " Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(5), pages 1731-64, December.
  10. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, Econometric Society, vol. 51(2), pages 485-505, March.
  11. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 61(4), pages 409-25, October.
  12. Harris, Lawrence, 1987. "Transaction Data Tests of the Mixture of Distributions Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 22(02), pages 127-141, June.
  13. G. William Schwert, 1990. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
  14. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. " Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 153-81, March.
  15. Sentana, Enrique & Wadhwani, Sushil B, 1992. "Feedback Traders and Stock Return Autocorrelations: Evidence from a Century of Daily Data," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(411), pages 415-25, March.
  16. Morse, Dale, 1980. "Asymmetrical Information in Securities Markets and Trading Volume," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 15(05), pages 1129-1148, December.
  17. Jain, Prem C. & Joh, Gun-Ho, 1988. "The Dependence between Hourly Prices and Trading Volume," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 23(03), pages 269-283, September.
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