Stock Market Trading Volume

THE HANDBOOK OF FINANCIAL ECONOMETRICS, Y. A¨ıt-Sahalia and L. Hansen, eds., New York: North-Holland, 2009

110 Pages Posted: 16 May 2009

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering; Santa Fe Institute

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

Abstract

If price and quantity are the fundamental building blocks of any theory of market interactions, the importance of trading volume in understanding the behavior of financial markets is clear. However, while many economic models of financial markets have been developed to explain the behavior of prices - predictability, variability, and information content - far less attention has been devoted to explaining the behavior of trading volume. In this chapter, we hope to expand our understanding of trading volume by developing well-articulated economic models of asset prices and volume and empirically estimating them using recently available daily volume data for individual securities from the University of Chicago's Center for Research in Securities Prices. Our theoretical contributions include: (1) an economic definition of volume that is most consistent with theoretical models of trading activity; (2) the derivation of volume implications of basic portfolio theory; and (3) the development of an intertemporal equilibrium model of asset market in which the trading process is determined endogenously by liquidity needs and risk-sharing motives. Our empirical contributions include: (1) the construction of a volume/returns database extract of the CRSP volume data; (2) comprehensive exploratory data analysis of both the time-series and cross-sectional properties of trading volume; (3) estimation and inference for price/volume relations implied by asset-pricing models; and (4) a new approach for empirically identifying factors to be included in a linear-factor model of asset returns using volume data.

Keywords: Trading Volume, Asset Pricing, Portfolio Theory, Mean-Variance Optimization

JEL Classification: G11, G12, G14

Suggested Citation

Lo, Andrew W. and Wang, Jiang, Stock Market Trading Volume. THE HANDBOOK OF FINANCIAL ECONOMETRICS, Y. A¨ıt-Sahalia and L. Hansen, eds., New York: North-Holland, 2009, Available at SSRN: https://ssrn.com/abstract=1405583

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

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E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E62-614
100 Main Street
Cambridge, MA 02142
United States
617-253-2632 (Phone)
617-258-6855 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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