Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory

Andrew Lo () and Jiang W. Wang

No 7625, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the implications of portfolio theory for the cross-sectional behavior of equity trading volume. Two-fund separation theorems suggest a natural definition for trading activity: share turnover. If two-fund separation holds, share turnover must be identical for all securities. If (K+1)-fund separation holds, we show that turnover satisfies an approximately linear K-factor structure. These implications are examined empirically using individual weekly turnover data for NYSE and AMEX securities from 1962 to 1996. We find strong evidence against two-fund separation, and a principal-components decomposition suggests that turnover is well approximated by a two-factor linear model.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2000-03
New Economics Papers: this item is included in nep-fin and nep-fmk
Note: AP
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Citations: View citations in EconPapers (259)

Published as Lo, A. W. and J. Wang. "Trading Volume: Definitions, Data Analysis, And Implications Of Portfolio Theory," Review of Financial Studies, 2000, v13(2,Summer), 257-300.

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