The Effect of Stock Return Sequences on Trading Volumes

Abstract

The present study explores the effect of the gambler's fallacy on stock trading volumes. I hypothesize that if a stock's price rises (falls) during a number of consecutive trading days, then the gambler's fallacy may cause at least some of the investors to expect that the stock's price "has" to subsequently fall (rise), and thus, to increase their willingness to sell (buy) the stock, resulting in a stronger degree of disagreement between the investors and a higher-than-usual stock trading volume on the first day when the stock's price indeed falls (rises). Employing a large sample of daily price and trading volume data, I document that following relatively long sequences of the same-sign stock returns, on the days when the sign is reversed, the trading activity in the respective stocks is abnormally high. Moreover, average abnormal trading volumes gradually and significantly increase with the length of the preceding return sequence. The effect is slightly more pronounced following the sequences of negative stock returns, and remains significant after controlling for other potentially influential factors, including contemporaneous and lagged actual and absolute stock returns, historical stock returns and volatilities, and company-specific events, such as earnings announcements and dividend payments.

The Relationship Between Trading Volume and Market Returns: A VAR/Granger Causality Testing Approach in the Context of Saudi Arabia

“…The Granger causality Wald test results (Table 5) support unidirectional causality between trading volume and Saudi stock market returns. Trading volume does not Granger-cause market returns, which is in line with the findings of Sabri (2008), Mpofu (2012) and Kudryavtsev (2017). On the contrary, market returns do Granger-cause trading volume, which is consistent with the findings of Huddart et al (2012) and Adhikari (2020).…”

“…The trading volume of industrial firms listed on Muscat's securities exchange Granger-causes its returns. Kudryavtsev (2017) unveiled the impact of price reversal of companies listed in the S&P 500 Index on trading volume. When a stock's return reverses the sign after a sequence of previous returns with the opposite sign, this leads to a large increase in the stock's trading volume.…”

Market Liquidity and Stock Return in the Nigerian Stock Exchange Market

“…It indicates that MTO significantly affects stock return in the Nigerian Stock Exchange market at 5% level of significance. This finding is in line with Leirvik, Fiskerstrand, and Fjellvikås, (2017), Kganyago and Gumbo (2015), Shammakhi and Mehrabi (2016), Onoh (2016), Onoh et al (2017a), Kahuthu (2017), Kudryavtsev (2017). They agreed that MTO had a positive and significant effect on stock return.…”

“…It shows that TVO does not significantly affect stock return in the Nigerian Stock Exchange market at 5% level of significance. This finding is consistent with the Akram (2014), Amihud et al (2015), Assefa and Mollick (2014), Azar (2014), Demirgünes (2016 and Ariwa et al (2017) but it is not in line with Shammakhi and Mehrabi (2016), Onoh (2016), Onoh et al (2017a), Kahuthu (2017) and Kudryavtsev (2017).…”

Does Friday-Monday Dance with Harmony?

“…Further, they state: it is essential to first understand the finding on calendar effects and price returns and then connect them with the insight on the price-volume relation (p: 137). Kudryavtsev, (2017): while trading activity has been paid significantly less attention. Batrinca et al's research motivation provide a new bridge for research on the weekend effect's trading volume.…”