| Abstract: | We examine the dynamic relation between return and volume ofindividual stocks. Using a simple model in which investors tradeto share risk or speculate on private information, we show thatreturns generated by risk-sharing trades tend to reverse themselves,while returns generated by speculative trades tend to continuethemselves. We test this theoretical prediction by analyzingthe relation between daily volume and first-order return autocorrelationfor individual stocks listed on the NYSE and AMEX. We find thatthe cross-sectional variation in the relation between volumeand return autocorrelation is related to the extent of informedtrading in a manner consistent with the theoretical prediction. |
