Trading Styles and Trading Volume

34 Pages Posted: 25 Aug 2005

See all articles by Stefan Nagel

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2005

Abstract

Many investors in equity markets follow trading styles based on stock characteristics like firm size or momentum. Because stocks' characteristics change over time, style investors must rebalance their portfolios to avoid style drift. In this paper, I analyze how the rebalancing trades of style traders affect the cross-section of trading volume. Specifically, I estimate, using mutual fund stock holdings data, how the propensity to sell a stock depends on recent changes in stock characteristics. It turns out to be most strongly related to changes in firm size, value, and momentum characteristics. The fitted values of the propensity-to-sell model explain a significant portion of the cross-sectional variation in total trading volume, controlling for other determinants of volume and using instrumental variables to deal with the endogeneity of stock characteristics. The results suggest that style investing is an important source of trading volume.

Keywords: Trading Volume, Style Investing, Mutual Funds

JEL Classification: G10, G20

Suggested Citation

Nagel, Stefan, Trading Styles and Trading Volume (August 2005). Available at SSRN: https://ssrn.com/abstract=785345 or http://dx.doi.org/10.2139/ssrn.785345

Stefan Nagel (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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