SIFR Research Report Series, Institute for Financial Research
Which Past Returns Affect Trading Volume?
() and Martin Weber
Abstract: Anecdotal evidence and recent theoretical models argue
that past stock returns affect subsequent stock trading volume. We study
3,000 individual investors over a 51 month period to test this prediction
using linear panel regressions as well as negative binomial panel
regressions and Logit panel regressions. We find that both past market
returns as well as past portfolio returns affect trading activity of
individual investors (as measured by stock portfolio turnover, the number
of stock transactions, and the probability to trade stocks in a given
month) and are thus able to confirm predictions of overconfidence models.
However, contrary to intuition, the effect of market returns on subsequent
trading volume is stronger for the whole group of investors. Using survey
data of our investor sample, we present evidence that individual investors,
on average, are unable to give a correct estimate of their own past
realized stock portfolio performance. The correlation between return
estimates and past realized returns is insignificant. For the subgroup of
respondents, we are able to analyze the link between the ability to
correctly estimate the past realized stock portfolio performance on the one
hand and the dependence of trading volume on past returns on the other
hand. We find that for the subgroup of investors that is better able to
estimate the own past realized stock portfolio performance, the effect of
past portfolio returns on trading volume is stronger. We argue that this
finding might explain our results concerning the relation between past
returns and subsequent trading volume.
Keywords: Individual investors; Investor behavior; Trading volume; Stock returns and Trading Volume; Overconfidence; Discount broker; Online broker; Online banks; Panel data; Count data; (follow links to similar papers)
JEL-Codes: D80; G10; (follow links to similar papers)
51 pages, October 15, 2005
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- This paper is published as:
Glaser, Markus and Martin Weber, (2009), 'Which Past Returns Affect Trading Volume?', Journal of Financial Markets, Vol. 12, No. 1, pages 1-31
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