ON IMPROVING THE PERFORMANCE OF THE MARKET MODEL

Data on 4,087 securities from 1988 to 1990 are used to test the relation between market model R² and trading volume. Eliminating high-volume observations increases R² by about 10 percent, confirming results previously reported. This study indicates that this improvement is possible by eliminating a small number of observations. It also indicates that this relation between R² and volume is unrelated to firm size.