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Rev Fin 2002; 15:1005-1047
© 2002 the Society for Financial Studies

Dynamic Volume-Return Relation of Individual Stocks

Guillermo Llorente
Universidad Autonoma de Madrid

Roni Michaely
Cornell University and IDC

Gideon Saar
New York University

Jiang Wang
MIT and National Bureau of Economic Research

Address correspondence to Roni Michaely, 431 Sage Hall, Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853, or e-mail: rm34{at}cornell.edu.

Abstract

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.


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