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Trading Volume: Definitions, Data Analysis, and Implications of Portfolio TheoryAndrew W. LoMassachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); National Bureau of Economic Research (NBER) Jiang WangMassachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER) Review of Financial Studies, Vol. 13, Iss. 2 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.
JEL Classification: G12 Accepted Paper SeriesDate posted: December 8, 1999Suggested CitationContact Information
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