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Does trading activity contain information to predict stock returns? Evidence from Euronext Paris

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  • Wael Louhichi

Abstract

This article aims to examine the causal and dynamic relationship between trading activity and stock returns, using detailed intraday data from Euronext Paris. We distinguish between two measures of trading activity: the raw volume metric (the nondirectional volume) and the directional volume. In line with the existing literature, we find a unidirectional causality running from stock returns to nondirectional volume. Furthermore, we highlight a strong bidirectional relation between stock returns and directional volume. This result is interesting and has several implications. First, it provides evidence that the directional volume is more informative than the nondirectional volume. Second, it shows that the directional volume helps predict stock returns. Third, it provides an empirical test for the Mixture Distribution Hypothesis (MDH) and the sequential arrival hypothesis, which posit that the information content of the trading activity affects future returns.

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  • Wael Louhichi, 2012. "Does trading activity contain information to predict stock returns? Evidence from Euronext Paris," Applied Financial Economics, Taylor & Francis Journals, vol. 22(8), pages 625-632, April.
  • Handle: RePEc:taf:apfiec:v:22:y:2012:i:8:p:625-632
    DOI: 10.1080/09603107.2011.621879
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    File URL: http://hdl.handle.net/10.1080/09603107.2011.621879
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    1. repec:eee:riibaf:v:44:y:2018:i:c:p:76-87 is not listed on IDEAS
    2. Fredj Jawadi & Waël Louhichi & Abdoulkarim Idi Cheffou & Rivo Randrianarivony, 2016. "Intraday jumps and trading volume: a nonlinear Tobit specification," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1167-1186, November.
    3. Eyup Kadioðluu & Guray Kuçukkocaoglu & Saim Kilic, 2015. "Closing price manipulation in Borsa Istanbul and the impact of call auction sessions," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 15(3), pages 213-221, September.

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