Volume Surges Have a Fading Impact on Returns

A study of Australian stocks found that stocks experiencing a positive volume shock—a spike in the number of shares traded—tend to outperform. However, the outperformance is short term.

A study of Australian stocks found that stocks experiencing a positive volume shock—a spike in the number of shares traded—tend to outperform. The outperformance is short term, with returns drifting back toward more average levels within a period of approximately 12 months. The outperformance is more prominent among smaller, less-followed stocks.

The study’s authors defined a volume shock as an increase or decrease in monthly trading volume relative to a stock’s 12-month average. Changes in volume were measured at the individual company level. Stocks with unusually large increases or decreases in volume relative to both their average volume and the typical variation around those averages were categorized as experiencing a shock. Monthly volume was used to smooth out the day-to-day fluctuations in trading activity.

Equal-weighted portfolios of stocks experiencing the largest positive shocks experienced the largest one-month returns. Performance declined as the volume shocks decreased in magnitude. The “High” portfolio, which consisted of stocks whose volume shocks ranked in the top 10% (most positive), experienced one-month returns of 2.87%. The “Low” portfolio, which consisted of stocks whose volume shocks ranked in the bottom 10% (most negative), experienced one-month returns of –0.05%. Twelve months after the shock, the monthly returns were closer: 0.93% for the High portfolio and 0.79% for the Low portfolio.

Trading activity—defined as relative turnover (trading volume relative to the number of shares outstanding)—increased following a positive volume shock. Stocks with low prices, small market capitalizations, low levels of institutional ownership and low turnover experienced significant increases in their relative turnover following a volume shock. (The authors categorized high prices as being in excess of $1.00 in Australian dollars, median prices being between AU$0.50 and AU$1.00 and low prices as being below AU$0.50.)

The increase in relative turnover is attributed to increased visibility. The spike in volume draws attention to the stock and results in more trading activity. Shares of large companies experience less of a benefit from a volume shock because they were previously better known prior to the surge in volume.

“Volume Shocks and Stock Returns: An Alternative Test,” Angel Zhong, Daniel Chai, Bob Li and Mardy Chiah; Pacific-Basin Finance Journal accepted manuscript.