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Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory

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  • Andrew W. Lo
  • Jiang W. Wang

Abstract

We examine the implications of portfolio theory for the cross-sectional behavior of equity trading volume. Two-fund separation theorems suggest a natural definition for trading activity: share turnover. If two-fund separation holds, share turnover must be identical for all securities. If (K+1)-fund separation holds, we show that turnover satisfies an approximately linear K-factor structure. These implications are examined empirically using individual weekly turnover data for NYSE and AMEX securities from 1962 to 1996. We find strong evidence against two-fund separation, and a principal-components decomposition suggests that turnover is well approximated by a two-factor linear model.

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  • Andrew W. Lo & Jiang W. Wang, 2000. "Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory," NBER Working Papers 7625, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7625
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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