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A Trading Volume Benchmark: Theory and Evidence

Part of: JFQA William F. Sharpe Best Paper Award Winner

Published online by Cambridge University Press:  06 April 2009

Paula A. Tkac
Paula A. Tkac
Affiliation:
Department of Finance and Business Economics, University of Notre Dame, Notre Dame, IN 46556.
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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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 1 , March 1999 , pp. 89 - 114
Copyright
Copyright © School of Business Administration, University of Washington 1999

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