Which past returns affect trading volume?

• Published in: Journal of financial markets (Amsterdam, Netherlands) Vol. 12; no. 1; pp. 1 - 31
• Main Authors: Glaser, Markus, Weber, Martin
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.02.2009; Elsevier
• Series: Journal of Financial Markets
• Subjects: Count data; Differences of opinion; Discount broker; Individual investors; Individual investors Investor behavior Trading volume Stock returns and trading volume Overconfidence Differences of opinion Discount broker Online broker Panel data Count data; Investor behavior; Online broker; Overconfidence; Panel data; Stock returns and trading volume; Trading volume; Differences of opinion; Stock returns and trading volume; Panel data; D8; Count data; Individual investors; G1; Investor behavior; Online broker; Discount broker; Trading volume; Overconfidence
• ISSN: 1386-4181; 1878-576X
• DOI: 10.1016/j.finmar.2008.03.001

Anecdotal evidence suggests and recent theoretical models argue that past stock returns affect subsequent stock trading volume. We study 3,000 individual investors over a 51 month period to test this apparent link between past returns and volume using several different panel regression models (linear panel regressions, negative binomial panel regressions, Tobit panel regressions). We find that both past market returns as well as past portfolio returns affect trading activity of individual investors (as measured by stock portfolio turnover, the number of stock transactions, and the propensity to trade stocks in a given month). After high portfolio returns, investors buy high risk stocks and reduce the number of stocks in their portfolio. High past market returns do not lead to higher risk taking or underdiversification. We argue that the only explanations for our findings are overconfidence theories based on biased self-attribution and differences of opinion explanations for high levels of trading activity.