Volume and stock returns in the Chinese market

Yi Fang, Xin Zhou, Yi-Feng Wen and Qi-Lang Ou

International Review of Financial Analysis, 2024, vol. 94, issue C

Abstract: We propose and empirically investigate hypotheses regarding the volume-return relationship in the Chinese stock market, taking into account the impact of prevalent noise trading and short-selling restrictions. Our findings reveal a negative correlation between trading volume and returns specifically among overvalued stocks. However, no significant correlation is observed for undervalued stocks, nor is there a consistent volume amplification effect. In contrast to our findings, Han, Huang, Huang, and Zhou (2021) also reported a positive correlation between expected return and trading volume for undervalued stocks, and they highlighted the amplified impact of trading volume in the US market. Furthermore, we observe that stricter short-selling restrictions in the Chinese market for overvalued stocks result in a larger deviation from fundamental value as the trading volume increases accompanied by greater disagreement among noise investors. These findings suggest that comprehending market disparities necessitates considering noise trading and short-selling restrictions as crucial factors.

Keywords: Volume; Mispricing; Short-selling restrictions; Noise trading; Stock returns (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s1057521924001972

DOI: 10.1016/j.irfa.2024.103265

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