Trading volume and prediction of stock return reversals: Conditioning on investor types' trading
Numan Ülkü and
Journal of Forecasting, 2019, vol. 38, issue 6, 582-599
We show that contrasting results on trading volume's predictive role for short‐horizon reversals in stock returns can be reconciled by conditioning on different investor types' trading. Using unique trading data by investor type from Korea, we provide explicit evidence of three distinct mechanisms leading to contrasting outcomes: (i) informed buying—price increases accompanied by high institutional buying volume are less likely to reverse; (ii) liquidity selling—price declines accompanied by high institutional selling volume in institutional investor habitat are more likely to reverse; (iii) attention‐driven speculative buying—price increases accompanied by high individual buying‐volume in individual investor habitat are more likely to reverse. Our approach to predict which mechanism will prevail improves reversal forecasts following return shocks: An augmented contrarian strategy utilizing our ex ante formulation increases short‐horizon reversal strategy profitability by 40–70% in the US and Korean stock markets.
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jforec:v:38:y:2019:i:6:p:582-599
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