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Expected return, volume, and mispricing

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  • Han, Yufeng
  • Huang, Dashan
  • Huang, Dayong
  • Zhou, Guofu

Abstract

We find that expected return is related to trading volume positively among underpriced stocks but negatively among overpriced stocks. As such, trading volume amplifies mispricing. Our results are robust to alternative mispricing and trading volume measures, alternative portfolio formation methods, and controlling for variables that are known to have amplification effects on mispricing. By attributing trading volume to investor disagreement, we show that our results are consistent with the recent theoretical model of Atmaz and Basak (2018) in that investor disagreement predicts stock returns conditional on expectation bias.

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  • Han, Yufeng & Huang, Dashan & Huang, Dayong & Zhou, Guofu, 2022. "Expected return, volume, and mispricing," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1295-1315.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:3:p:1295-1315
    DOI: 10.1016/j.jfineco.2021.05.014
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    More about this item

    Keywords

    Turnover; Trading volume; Mispricing; Disagreement; Expectation bias;
    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
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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