The Influence of Investors’ Positive Feedback Trading on Dynamic Volume-Return Relation

Abstract

It is reported that, in individual stocks, a large increase in trading volume indicates stronger return persistence or weaker reversal effects. A reason given for this volume-return relation has been that it can signal the existence of important fundamental news. In this study, we present another plausible explanation. Through empirical analysis, we show that the volume-return relation remains strong even if there is no important fundamental news. Applying market model simulation, we demonstrate that positive feedback in investors’ trading behaviour can cause this volume-return relation. Our findings suggest that the relation can be caused by factors not directly related to fundamental news, especially by investors’ positive feedback trading.