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
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