Expected Return, Volume and Mispricing
49 Pages Posted: 16 May 2018 Last revised: 26 Jan 2020
Date Written: March 1, 2019
We find that expected return is positively related to trading volume for underpriced stocks, but negatively related to trading volume for overpriced stocks. Overall, mispricing is concentrated in high volume stocks. Our results are robust to alternative mispricing and volume level definitions, different portfolio formations, and controlling for those variables that have been shown to have amplifying effects on mispricing. Taking trading volume as a proxy for investor disagreement, our empirical results are consistent with the recent theoretical model of Atmaz and Basak (2018) that volume predicts returns conditional on mispricing.
Keywords: Turnover, Trading Volume, Mispricing, Disagreement, Expectation Bias
JEL Classification: G12
Suggested Citation: Suggested Citation