Momentum and Reversals in Equity‐Index Returns During Periods of Abnormal Turnover and Return Dispersion

Abstract

We document new patterns in the dynamics between stock returns and trading volume. Speci¢cally, we ¢nd substantial momentum (reversals) in consecutive weekly returns when the latter week has unexpectedly high (low) turnover. This pattern is evident in equity indices, index futures, and individual stocks. Similarly, we also ¢nd that the autocorrelation in equity-index returns is increasing with the unexpected dispersion across the latter week's ¢rm-level returns. Weeks with extreme turnover and dispersion shocks (both high and low) tend to have more macroeconomic news releases. Our ¢ndings bear on understanding price formation and the economic interpretation of turnover and dispersion shocks.IN THIS PAPER, we document new patterns in the dynamics between stock returns and trading volume. Speci¢cally, we ¢nd substantial momentum in consecutive weekly stock returns when the latter week has abnormally high turnover. 1 Conversely, we ¢nd substantial reversals in consecutive weekly returns when the latter week has abnormally low turnover. By abnormal turnover, we mean the shock in the turnover time series after controlling for its autoregressive properties and for normal movements with the market return. 2 We ¢nd this return pattern in equity indices, index futures, individual stocks, and in the U.S., Japan, and U.K. stock markets.

Volatilities and Momentum Returns in Real Estate Investment Trusts

“…Some researchers attribute momentum to investors' overreaction or underreaction to firm-specific news, 1 while others use rational riskreturn theories to interpret momentum. Some recent studies on risk-based explanations on momentum returns include Connolly and Stivers (2003), Grundy and Martin (2001), Chordia and Shivakumar (2002), Johnson (2002), Ahn et al (2003), and Moskowitz (2003). 2 Nevertheless, these studies do not reach a conclusive explanation.…”

“…Behavioral explanations on momentum returns include investors' underreaction to firm-specific news (Barberis et al 1998 andGrinblatt andHan 2005) or overreaction to firm-specific news (Daniel et al 1998, 2001, Hong and Stein 1999, and Barberis et al 2003. 2 Lee and Swaminathan (2000) and Connolly and Stivers (2003) suggest that industry past volume predicts future returns. Grundy and Martin (2001) and Jegadeesh and Titman (2001) find that cross-sectional differences in expected returns is not the dominant cause of momentum.…”

Price–volume relations of DAX companies

“…In these studies, higher trading volume is generally found to be accompanied by a drop in return autocorrelation. Recently, Connolly and Stivers (2003) evaluated the autocorrelation properties of stock returns in conjunction with abnormal turnover on a weekly basis. They found momentum in stock returns in the case of contemporaneous, abnormally high trading volume, while returns reverse direction in the case of abnormally low trading volume.…”

Return dispersion and expected returns

“…Christie and Huang (1994) find that return dispersion is associated with the business cycle; return dispersion is higher during economic recessions. Connolly and Stivers (2003) show that momentum (reversal) is positively (negatively) related to future return dispersion. Harvey (1997, 2000) document that a higher return dispersion tends to have a higher (lower) volatility level for developed (emerging) markets.…”