The Cross-Section of Expected Trading Activity

This article studies cross-sectional variations in trading activityfor a comprehensive sample of NYSE/AMEX and Nasdaq stocks overa period of about 40 years. We test whether trading activitydepends upon the degree of liquidity trading, the mass of informedtraders, and the extent of uncertainty and dispersion of opinionabout fundamental values. We hypothesize that liquidity (ornoise) trading depends both on a stock’s visibility andon portfolio rebalancing needs triggered by past price performance.We use firm size, age, price, and the book-to-market ratio asproxies for a firm’s visibility. The mass of informedagents is proxied by the number of analysts whereas forecastdispersion and firm leverage proxy for differences of opinion.Earning volatility and absolute earning surprises proxy foruncertainty about fundamental values. Overall, the results providesupport for theories of trading based on stock visibility, portfoliorebalancing needs, differences of opinion, and uncertainty aboutfundamental values.