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.