A New Approach to the Duo-Factor-Model of Return and Volume

46 Pages Posted: 16 Mar 2002

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Jianping Mei

New York University (NYU) - Department of Finance

Date Written: February 2002

Abstract

This paper introduces a recently developed consistent statistic by Bai and Ng (2002) to determine the number of factors in an approximate multifactor model. We use this new approach to study a recent work by Lo and Wang (2000), which shows that a multifactor asset-pricing model not only imposes factor restrictions on stock returns but on trading volume as well. We explicitly test their theoretical model restriction using individual stock and turnover data from NYSE and AMEX from 1962 to 1996.

While we find that the duo-factor model captures a great deal of common variation of return and trading volume, the data rejects a model restriction that excess return and turnover have the same number of systematic factors. We decompose excess return and turnover into systematic and idiosyncratic components. We discover a significant increase in the variation of idiosyncratic turnover through time, analogous to the finding of a notable increase in firm-specific volatility by Campbell, Lettau, Malkiel and Xu (2001). We also find significant co-movements between volatility and turnover at the systematic levels. Our findings support the view that trading volume is not purely random but driven by trading activities associated with macroeconomic and firm news.

JEL Classification: G12

Suggested Citation

Cremers, K. J. Martijn and Mei, Jianping, A New Approach to the Duo-Factor-Model of Return and Volume (February 2002). Available at SSRN: https://ssrn.com/abstract=303287 or http://dx.doi.org/10.2139/ssrn.303287

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Jianping Mei (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

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