Trading Volume and Stock Investments

Previous studies suggest that trading-volume measures may proxy for a number of factors, including liquidity, momentum, and information. For relatively illiquid (typically smaller) stocks, investors may demand a liquidity premium, which can result in a negative relationship between trading volume (as a proxy for liquidity) and stock returns. For relatively liquid (typically larger) stocks-the focus of this article-momentum and information effects may dominate and result in a positive relationship between trading volume and stock returns. Portfolios of S&P 500 Index and large-capitalization stocks sorted on higher trading volume and turnover tend to have higher subsequent returns (holding periods of 1-12 months) than those with lower trading volume.