Trading Volume and Serial Correlation in Stock Returns

John Y. Campbell (), Sanford Jay Grossman and Jiang Wang

The Quarterly Journal of Economics, 1993, vol. 108, issue 4, pages 905-39

Abstract: This paper investigates the relationship between aggregate stock market trading volume and the serial correlation of daily stock returns. For both stock indexes and individual large stocks, the first-order daily return autocorrelation tends to decline with volume. The paper explains this phenomenon using a model in which risk-averse 'market makers'accommodate buying or selling pressure from 'liquidity'or 'noninformational' traders. Changing expected stock returns reward market makers for playing this role. The model implies that a stock price decline on a high-volume day is more likely than a stock price decline on a low-volume day to be associated with an increase in the expected stock return. Copyright 1993, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 1993
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