Trading Volume and Serial Correlation in Stock Returns
John Y. Campbell
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Sanford J. Grossman
University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)
Massachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)
NBER Working Paper No. w4193
This paper investigates the relationship between stock market trading volume and the autocorrelations of daily stock index returns. The paper finds that stock return autocorrelations tend to decline with trading volume. The paper explains this phenomenon using a model in which risk-averse "market makers" accommodate buying or selling pressure from "liquidity" or "non-informational" traders. Changing expected stock returns reward market makers for playing this role. The model implies that a stock price decline on a high-volume day is more likely than a stock price decline on a low-volume day to be associated with an increase in the expected stock return.
Number of Pages in PDF File: 45working papers series
Date posted: January 30, 2003
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