Does trading volume affect the serial correlation of daily stock returns?
TRADING VOLUME AND SERIAL CORRELATION IN STOCK RETURNS* This paper investigates the relationship between aggregate stock market trading volume and the serial correlation of daily stock returns. For both stock indexes and individual large stocks, the first-order daily return autocorrelation tends to decline with volume.
Why do stock return autocorrelations decline with trading volume?
The paper finds that stock return autocorrelations tend to decline with trading volume. The paper explains this phenomenon using a model in which risk-averse "market makers" accommodate buying or selling pressure from "liquidity" or "non-informational" traders. Changing expected stock returns reward market makers for playing this role.
What is the trading volume?
The trading volume is measured for stocks, bonds, futures, and options contracts. A candlestick chart is often used to check the trading volume of a stock, where green denotes the importance of buying and red color, indicates the sale volume of a particular stock over a specific period. Volume charts are also prepared based on the period.
Can the return and volume of stock returns predict each other?
In summary, the return and volume are strongly related contemporaneously but there is little evidence that either can be used to predict the other. De Medeiros and Doornik (2006) investigated the empirical relationship between stock returns, return volatility and trading volume using data from the Brazilian stock market.
Trading Volume and Serial Correlation in Stock Returns