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Bridge over ocean
1 March 2009 Financial Analysts Journal Volume 65, Issue 2

Trading Volume and Stock Investments

  1. Jeffrey H. Brown
  2. Douglas K. Crocker
  3. Stephen R. Foerster

Previous studies suggest that trading-volume measures may proxy for a number of
factors, including liquidity, momentum, and information. For relatively illiquid
(typically smaller) stocks, investors may demand a liquidity premium, which can
result in a negative relationship between trading volume (as a
proxy for liquidity) and stock returns. For relatively liquid (typically larger)
stocks—the focus of this article—momentum and information effects
may dominate and result in a positive relationship between
trading volume and stock returns. Portfolios of S&P 500 Index and
large-capitalization stocks sorted on higher trading volume and turnover tend to
have higher subsequent returns (holding periods of 1–12 months) than those
with lower trading volume.

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