Disagreement, Aggregate Trading Volume, and Excess Market Returns
47 Pages Posted: 21 Nov 2017
Date Written: April 30, 2017
We show that unusually high aggregate stock trading volume predicts higher future excess market returns. On average, the market gains 30 to 50 basis points in the week following a period of unusually high market volume. The effect is even more pronounced when high unusual volume is accompanied by higher aggregate stock return volatility. In out-of-sample tests of predictability, unusually high aggregate volume outperforms a host of other variables that have also been shown to predict the equity risk premium. This aggregate volume - return relation holds for a majority of G7 countries, and it is robust across alternative measures of aggregate trading volume, as well as across different subperiods. Our evidence is consistent with the predictions of an extensive theoretical literature which implies that disagreement among market participants should be associated with a positive risk premium.
Keywords: Disagreement, abnormal trading volume, asset prices, equity risk premium, volatility, return predictability
JEL Classification: G12, G15, G17
Suggested Citation: Suggested Citation