Expected Return, Volume, and Mispricing
81 Pages Posted: 16 May 2018 Last revised: 20 May 2021
Date Written: March 1, 2019
We find that expected return is related to trading volume positively among underpriced stocks but negatively among overpriced stocks. As such, trading volume amplifies mispricing. Our results are robust to alternative mispricing and trading volume measures, alternative portfolio formation methods, and controlling for variables that are known to have amplification effects on mispricing. By attributing trading volume to investor disagreement, we show that our results are consistent with the recent theoretical model of Atmaz and Basak (2018) in that investor disagreement predicts stock returns conditional on expectation bias.
Keywords: Turnover, Trading Volume, Mispricing, Disagreement, Expectation Bias
JEL Classification: G12
Suggested Citation: Suggested Citation