A conventional wisdom on Wall Street is that "volume is the fuel for stock prices." The question is how trading volume influences subsequent price change. The hypothesis presented here is that price changes are more likely to reverse following weak volume support than strong volume support, because price changes reflect demand for a stock and higher volume reflects a greater likelihood that the demand originates from informed rather than uninformed trade. Consequently, as volume increases, the probability that the price change is information driven increases. The evidence indicates that large price changes on days with weak volume support tend to reverse, at least partially, the next day. This volume effect is reinforced by, but is independent of, a bid-ask bounce effect. Returns do not reverse following days of strong volume support. In fact, large price increases with strong volume support tend to be followed by another price increase the next day.
Read the Complete Article in Financial Analysts Journal
Financial Analysts Journal
CFA Institute Member ContentPublisher Information
Association for Investment Management and Research
11 pages doi.org/10.2469/faj.v50.n6.57ISSN/ISBN: 0015-198X
We're using cookies, but you can turn them off in Privacy Settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy.
Privacy Settings
Functional cookies, which are necessary for basic site functionality like keeping you logged in, are always enabled.
