Price Momentum and Trading Volume

This study shows that past trading volume provides an important link between “momentum” and “value” strategies. Specifically, we find that firms with high ~low! past turnover ratios exhibit many glamour ~value! characteristics, earn lower ~higher! future returns, and have consistently more negative ~positive! earnings surprises over the next eight quarters. Past trading volume also predicts both the magnitude and persistence of price momentum. Specifically, price momentum effects reverse over the next five years, and high ~low! volume winners ~losers! experience faster reversals. Collectively, our findings show that past volume helps to reconcile intermediate-horizon “underreaction” and long-horizon “overreaction” effects. FINANCIAL ACADEMICS AND PRACTITIONERS have long recognized that past trading volume may provide valuable information about a security. However, there is little agreement on how volume information should be handled and interpreted. Even less is known about how past trading volume interacts with past returns in the prediction of future stock returns. Stock returns and trading volume are jointly determined by the same market dynamics, and are inextricably linked in theory ~e.g., Blume, Easley, and O’Hara ~1994!!. Yet prior empirical studies have generally accorded them separate treatment. In this study, we investigate the usefulness of trading volume in predicting cross-sectional returns for various price momentum portfolios. The study is organized into two parts. In the first part, we document the interaction between past returns and past trading volume in predicting future returns * Both Lee and Swaminathan are from the Johnson Graduate School of Management, Cornell University. We thank Yakov Amihud, Hal Bierman, Larry Brown, Tom Dyckman, David Easley, John Elliott, Eugene Fama, Wayne Ferson, Maureen O’Hara, Jay Ritter, Andrei Shleifer, René Stulz ~the editor!, Avanidhar Subrahmanyam, Yutaka Soejima, two anonymous referees, and workshop participants at Barclays Global Investors, 1998 Berkeley Program in Finance, Carnegie Mellon University, Chicago Quantitative Alliance’s Fall 1998 conference, Cornell University, the University of Florida, George Washington University, the University of Illinois at Urbana-Champaign, the Mitsui Life Finance Conference at the University of Michigan, the 1998 NBER Behavioral Finance Meeting, the Ninth Financial, Economics and Accounting Conference, UNC-Chapel Hill, the 1998 Prudential Securities Conference, the 1999 Q-Group Spring Conference, the Summer of Accounting and Finance Conference at Tel Aviv University, and the 1999 Western Finance Association Annual Meeting for helpful comments. We also thank Bill Gebhardt for his expert research assistance. Data on analyst following and long-term earnings growth forecasts are from I0B0E0S, Inc. Any errors are our own. THE JOURNAL OF FINANCE • VOL. LV, NO. 5 • OCT. 2000