Dynamic trading volume and stock return relation: Does it hold out of sample?

• Published in: International review of financial analysis 2018-07, Vol.58, p.195-210
• Main Authors: Wang, Zijun, Qian, Yan, Wang, Shiwen
• Format: Article
• Language: English
• Subjects: High volume return premium; Out-of-sample regression; Volume-return relation
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2017.10.003

This paper studies the dynamic relation between trading volume and stock returns from the perspective of out-of-sample stock return predictability. Evidence from the U.S. suggests that higher returns do follow more intensive trading, especially in the pre-2000 period. However, the ex-ante predictability delivers a small economic gain equivalent to an annual return of 0.73% for a risk-averse investor. This weak out-of-sample predictive power of volume is absent in most of the other major markets. Overall, investors are not likely to gain much financially by “riding the volume curve,” at least at the levels of net profits suggested by our findings. •Dynamic trading volume and stock return relation is studied from the perspective of out-of-sample stock return predictability•Evidence from the U.S. suggests that higher returns follow more trading in the pre-2000 period•The weak out-of-sample predictive power of volume is absent in most of the other major markets•Our results contradict findings by many in-sample studies and do not support a significant volume and return relation