A Dynamic Volume-Return Relation and Investors' Trend-Chasing Behavior

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 investors' trend-chasing behavior 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' trend-chasing behavior.