Bridge over ocean
1 March 2003 Financial Analysts Journal Volume 59, Issue 2

News, Not Trading Volume, Builds Momentum

  1. James Scott
  2. Margaret Stumpp
  3. Peter Xu

Recent research has found that price momentum and trading volume appear to predict subsequent stock returns in the U.S. market and that they seem to do so in a nonlinear fashion. Specifically, the effect of momentum appears more pronounced among high-volume stocks than among low-volume stocks. This effect would suggest the existence of an exploitable deviation from market efficiency. We argue that this phenomenon is a result of the underreaction of investors to earnings news—an effect that is most pronounced for high-growth companies. We show that, after earnings-related news and a stock's growth rate have been controlled for, the interaction between momentum and volume largely disappears.

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