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Dynamic Volume-Return Relation of Individual Stocks

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

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. Copyright 2002, Oxford University Press.

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Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 15 (2002)
Issue (Month): 4 ()
Pages: 1005-1047

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Handle: RePEc:oup:rfinst:v:15:y:2002:i:4:p:1005-1047
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