Decoding High-Volume Stock Momentum: Disagreement or Disposition?

Abstract

Since Lee and Swaminathan (2000) find that high-volume stocks tend to have high stock momentum, there have been several studies investigating this phenomenon, but none of them have reached a firm conclusion about what the underlying driver is. In this paper, we empirically test two competing theories based on investor disagreement and disposition effects and identify investor disagreement as the main driving force behind the positive volume-momentum association. We also find that the source of disagreement is related to systematic news rather than firm idiosyncratic news and the momentum spread induced by trading volume tends to vary across different business cycle stages, being higher during the expansion periods than the recession periods. Even though we cannot firmly conclude whether volume-momentum association is due to investor behavioral biases or time-varying risk premium, the latter clearly plays an important role for the early part of the sample. Furthermore, regardless of the source of the momentum spread, our finding suggests that volume acts as an “amplifier” for certain financial asset pricing anomalies (e.g., momentum effect) and disagreement is the main mechanism behind this amplification. This conclusion is consistent with Han, Huang, Huang, and Zhou (2021).

Keywords: Momentum, Volume, Disagreement, Disposition, Behavioral Biases, Business Cycle

JEL Classification: G12