Trading Volume and Serial Correlation in Stock Returns

Authors: John Y.Campbell; Sanford J.Grossman; Jiang Wang

Abstract: This papaer investigates the relationship between aggregate stock market trading volume and the serial correlation of daily stock returns; For both stockindexes and individual large stocks, the first-order daily return autocorrlation tends to decline with volume. The paper explains this phenomenon using a model in which risk-averse "market makers" accommodate buying or selling pressure from "liquidity"  or "noninformational" traders. Changing expected stock returns reward market makers form playing this role. The model implies that a stock price decline on a high-volume day is more likely than a stock price decline on a low-volume day to be associated with an increase in the expected stock return.

Campbell, Grossman,and Wang(1993).PDF