A Dynamic Volume–Return Relation and Investors' Positive Feedback Trading


Kotaro Miwa
Tokio Marine Asset Management
Marunouchi 1-3-1
Chiyoda-ku, Tokyo 100-0005


With individual stocks, a larger increase in trading volume indicates a stronger short-term return persistence. A reason for this short-horizon ‘volume–return relation’ is that it can signal the existence of fundamental news, which can be gradually incorporated into stock price. In this study, we present another plausible explanation by considering investors' short-term positive feedback trading. First, through empirical analysis, we show that the volume–return relation remains strong among stocks for which there is little fundamental news. Through a model-based analysis, we demonstrate that positive feedback trading can cause this relation even when there is no news. Our findings raise the possibility that the short-horizon volume–return relation is also caused by short-term positive feedback trading.