The Dynamic Volume-Return Relationship of Individual Stocks: The International Evidence

Abstract

We examine the volume-return relationship of individual stocks around the world. We frame our empirical investigation in the context of the heterogeneous agent, rational expectations, framework proposed by Llorente, Michaely, Saar, and Wang (2002) in which investors trade to speculate on their private information or to rebalance their portfolios i.e. to share risk). Their model predicts that returns tend to continue themselves, following high volume days, when they are generated by speculative trades while returns generated by risk-sharing trades tend to reverse themselves. We test this prediction internationally by analyzing the relationship between return autocorrelation and volume using a survivorship-bias free sample of 20,305 individual stocks from forty markets around the world. We find strong support for this theoretical prediction in the vast majority of countries covered in our sample. We also find that the quality of the country's information environment influences the dynamic volume-relation of individual stocks. Our evidence shows that stocks from countries with a high-quality information environment have a higher overall propensity towards return reversals than their counterparts from countries with a poor information environment. This finding has important implications for market participants and regulatory authorities.

Keywords: Information, Volume, Volume-return relation, Information asymmetry, International finance, International markets

JEL Classification: F30, G32, G15