Evidence That Trading Volume Sustains Stock Price Changes

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...

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Bibliographic Details
Published in:Financial analysts journal 1994-11, Vol.50 (6), p.57-67
Main Authors: Stickel, Scott E., Verrecchia, Robert E.
Format: Article
Language:English
Subjects:
Abnormal returns
Bid prices
Earnings per share
Economic theory
Financial advisers
Hypotheses
Liquidity
Market prices
Market value
Multivariate analysis
Nasdaq Composite Index
Price changes
Price level changes
Securities prices
Securities trading
Stock exchanges
Stock prices
Studies
Trade volume
Variable coefficients
Volume
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Summary: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.
ISSN:0015-198X
1938-3312
DOI:10.2469/faj.v50.n6.57