Skip to main content
×
Home
    • Aa
    • Aa
  • Journal of Financial and Quantitative Analysis, Volume 34, Issue 1
  • March 1999, pp. 89-114

A Trading Volume Benchmark: Theory and Evidence

  • Paula A. Tkac (a1)
  • DOI: http://dx.doi.org/10.2307/2676247
  • Published online: 01 April 2009
Abstract
Abstract

This paper provides a theoretical rebalancing benchmark for trading volume that delivers a connection between trading activity in individual stocks and market-wide volume. This model supports the empirical use of an adjustment for market-wide trading activity when filtering out normal trading volume. Data on a sample of large NYSE/AMEX firms support the usefulness of the benchmark. While 20% of the sample firms exhibit trading behavior that is consistent with the cross-sectional prediction of the rebalancing benchmark, systematic deviations exist. An analysis of deviations from the benchmark allows a characterization of anomalous trading activity. I find that average excess turnover vs. the benchmark is positively related to option availability and institutional ownership and negatively related to firm size. The data do not yield a uniform conclusion on the effect of S&P 500 inclusion. S&P 500 inclusion does not significantly increase the trading of firms that are already trading above benchmark levels, but does result in additional trading for firms that undertrade the benchmark prior to inclusion. An investigation of individual firm market model regressions indicates that this is a useful methodology for filtering out the anomalous trading documented here.

Copyright
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

L. Bamber The Information Content of Annual Earnings Releases: A Trading Volume Approach.” Journal of Accounting Research, 24 (1986), 4056.

M. Beneish , and J. Gardner . “Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List.” Journal of Financial and Quantitative Analysis, 30 (1995), 135157.

M. Beneish , and R. Whaley . “An Anatomy of the ‘S&P Game’: The Effects of Changing the Rules.” Journal of Finance, 51 (1996), 19091930.

H. Bessembinder ; K. Chang ; and P. Seguin . “An Empirical Examination of Information, Differences of Opinion and Trading Activity.” Journal of Financial Economics, 40 (1996), 105134.

L. Chan , and J. Lakonishok . “The Behavior of Stock Prices around Institutional Trades.” Journal of Finance, 50 (1995), 11471174.

D. Del Guercio The Distorting Effect of the Prudent Man Law on Institutional Equity Investments.” Journal of Financial Economics, 40 (1996). 3162.

D. Diamond , and R. Verrecchia . “Disclosure, Liquidity and the Cost of Capital.” Journal of Finance, 46 (1991), 13251359.

B. Dumas Two-Person Dynamic Equilibrium in the Capital Market.” Review of Financial Studies, 2 (1989), 157188.

E. Fama , and K. French . “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427466.

N. Hakansson Optimal Investment and Consumption Strategies under Risk for a Class of Utility Functions.” Econometrica, 38 (1970), 587607.

L. Harris , and E. Gurel . “Price and Volume Effects: Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures.” Journal of Finance, 41 (1986), 815829.

D. Keim , and A. Madhavan . “Transactions Costs and Investment Style: An Inter-exchange Analysis of Institutional Equity Trades.” Journal of Financial Economics, 46 (1997), 265292.

R. Kumar ; A. Sarin ; and K. Shastri . “The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis.” Journal of Finance, 53 (1998), 717732.

J. Lakonishok , and S. Smidt . “Volume for Winners and Losers: Taxation and Other Motives for Stock Trading.” Journal of Finance, 41 (1986), 951974.

J. Lakonishok , and T. Vermaelen . “Tax-Induced Trading around Ex-Dividend Days.” Journal of Financial Economics, 16 (1986), 287319.

A. Lynch , and R. Mendenhall . “New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index.” Journal of Business, 70 (1997), 351383.

R. Merton An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867887.

R. Michaely , and M. Murgia . “Heterogeneity on Prices and Volume around the Ex-Dividend Day: Evidence from the Milan Stock Exchange.” Review of Financial Studies, 8 (1995), 369399.

R. Michaely , and J. Vila . “Investors' Heterogeneity, Prices, and Volume around the Ex-Dividend Day.” Journal of Financial and Quantitative Analysis, 30 (1995), 171198.

R. Neal Direct Tests of Index Arbitrage Models.” Journal of Financial and Quantitative Analysis, 31 (1996), 541562.

G. Richardson ; S. Sefcik ; and R. Thompson . “A Test of Dividend Irrelevance Using Volume Reactions to a Change in Dividend Policy.” Journal of Financial Economics, 17 (1986), 313333.

M. Rubinstein An Aggregation Theory for Security Markets.” Journal of Financial Economics.” 1 (1974), 225244.

R. Sanders , and J. Zdanowicz . “Target Firm Abnormal Returns and Trading Volume around the Initiation of Change in Control Transactions.” Journal of Financial and Quantitative Analysis, 27 (1992), 109129.

A. Shleifer Do Demand Curves for Stocks Slope Down?Journal of Finance, 41 (1986), 579590.

A. Vijh S&P500 Trading Strategies and Stock Betas.” Review of Financial Studies, 7 (1994), 215251.

D. Yermack CEO Stock Option Awards and Company News Announcements.” Journal of Finance, 52 (1997), 449476.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×