Search Advanced

Quantitative Finance and Economics

2017, Volume 1, Issue 2: 186-204. doi: 10.3934/QFE.2017.2.186
Previous Article Next Article
Research article

Absolute Stock Returns and Trading Volumes: Psychological Insights

  • Economics and Management Department, The Max Stern Yezreel Valley College, P.O. Emek Yezreel, 19300, Israel
  • Received: 11 April 2017 Accepted: 21 June 2017 Published: 14 July 2017

  • The present study explores the effect of anchoring on stock trading volumes. I hypothesize that if on the days when the market index rises (falls), a given stock's return is higher (lower) than the market return, potentially perceived as a psychological "anchor", then investors may treat that as a salient event and subsequently increase their trading activity in the stock. Employing a large sample of daily price and trading volume data, I find support for this hypothesis, documenting that average abnormal daily stock trading volumes are significantly higher on the days when absolute daily stock returns are higher than the contemporaneous absolute market returns. This effect is found to be stronger on the days of negative stock and market returns, suggesting that on these days, investors are probably more inclined to treat the market returns as anchors when making their trading decisions. The effect remains significant after controlling for other potentially influential factors, including contemporaneous and lagged actual and absolute stock and market returns, historical stock returns and volatilities, and company-specific events, like earnings announcements and dividend payments.

    Citation: Andrey Kudryavtsev. Absolute Stock Returns and Trading Volumes: Psychological Insights[J]. Quantitative Finance and Economics, 2017, 1(2): 186-204. doi: 10.3934/QFE.2017.2.186

    Related Papers:

  • The present study explores the effect of anchoring on stock trading volumes. I hypothesize that if on the days when the market index rises (falls), a given stock's return is higher (lower) than the market return, potentially perceived as a psychological "anchor", then investors may treat that as a salient event and subsequently increase their trading activity in the stock. Employing a large sample of daily price and trading volume data, I find support for this hypothesis, documenting that average abnormal daily stock trading volumes are significantly higher on the days when absolute daily stock returns are higher than the contemporaneous absolute market returns. This effect is found to be stronger on the days of negative stock and market returns, suggesting that on these days, investors are probably more inclined to treat the market returns as anchors when making their trading decisions. The effect remains significant after controlling for other potentially influential factors, including contemporaneous and lagged actual and absolute stock and market returns, historical stock returns and volatilities, and company-specific events, like earnings announcements and dividend payments.


    加载中
    [1] Bajaj M, Vijh AM (1995) Trading Behavior and the Unbiasedness of the Market Reaction to Dividend Announcement. J Finance 50: 255-279. doi: 10.1111/j.1540-6261.1995.tb05173.x
    [2] Baker M, Stein J (2004) Market Liquidity as a Sentiment Indicator. J Financ Mark 7: 271-299. doi: 10.1016/j.finmar.2003.11.005
    [3] Bamber LS, Barron OE, Stober TL (1997) Trading Volume and Different Aspects of Disagreement Coincident with Earnings Announcements. The Account Rev 72: 575-597.
    [4] Bamber LS, Barron OE, Stober TL (1999) Differential Interpretations and Trading Volume. J Financ Quant Anal 34: 369-386. doi: 10.2307/2676264
    [5] Bamber LS, Barron OE, Stevens DE (2011) Trading Volume around Earnings Announcements and Other Financial Reports: Theory, Research Design, Empirical Evidence, and Directions for Future Research. Contemp Account Res 28: 431-471. doi: 10.1111/j.1911-3846.2010.01061.x
    [6] Barber BM, Odean T (2008) All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors. Rev Financ Stud 21: 785–818. doi: 10.1093/rfs/hhm079
    [7] Barron OE, Harris DG, Stanford M (2005) Evidence That Investors Trade on Private Event-Period Information around Earnings Announcements. Account Rev 80: 403-421. doi: 10.2308/accr.2005.80.2.403
    [8] Basci E, Ozyildinm S, Aydogan K (1996) A Note on Price–Volume Dynamics in an Emerging Stock Market. J Banking Finance 20: 389–400. doi: 10.1016/0378-4266(95)00003-8
    [9] Beaver WH (1968) The Information Content of Annual Earnings Announcements. Empirical Research in Accounting: Selected Studies, Supplement to J Account Res 6: 67–92. doi: 10.2307/2490070
    [10] Beggs A, Graddy K (2009) Anchoring Effects: Evidence from Art Auctions. Am Econ Rev 99: 1027-1039. doi: 10.1257/aer.99.3.1027
    [11] Biswas A, Burton S (1993) Consumer Perceptions of Tensile Price Claims in Advertisements: An Assessment of Claim Types across Different Discount Levels. J Acad Mark Sci 21: 217–229. doi: 10.1177/0092070393213005
    [12] Blume ME, Mackinlay AC, Terker B (1989) Order Imbalances and Stock Movements on October 19 and 20, 1987. J Finance 44: 827–848. doi: 10.1111/j.1540-6261.1989.tb02626.x
    [13] Bowman NA, Bastedo MN (2011) Anchoring Effects in World University Rankings: Exploring Biases in Reputation Scores. Higher Educ 61: 431-444. doi: 10.1007/s10734-010-9339-1
    [14] Caginalpa G, Desantisa M (2011) Stock Price Dynamics: Nonlinear Trend, Volume, Volatility, Resistance and Money Supply. Quant Finance 11: 849-861. doi: 10.1080/14697680903220356
    [15] Campbell JY, Grossman SJ, Wang J (1993) Trading Volume and Serial Correlation in Stock Returns. Q J Econ 108: 905–939. doi: 10.2307/2118454
    [16] Campbell SD, Sharpe SA (2009) Anchoring Bias in Consensus Forecasts and its Effect on Market Prices. J Financ Quant Anal 44: 369-390. doi: 10.1017/S0022109009090127
    [17] Cen L, Hilary G, Wei KCJ (2013) The Role of Anchoring Bias in the Equity Market: Evidence from Analysts' Earnings Forecasts and Stock Returns. J Financ Quant Anal 48: 47-76. doi: 10.1017/S0022109012000609
    [18] Cervone D, Peake PK (1986) Anchoring, Efficacy, and Action: The Influence of Judgmental Heuristics on Self-Efficacy Judgment and Behavior. J Pers Soc Psychol 50: 492–501. doi: 10.1037/0022-3514.50.3.492
    [19] Chapman GB, Johnson EJ (1994) The Limits of Anchoring. J Behav Decis Making, 7: 223–242. doi: 10.1002/bdm.3960070402
    [20] Chen G, Firth M, Rui OM (2001) The Dynamic Relation between Stock Returns, Trading Volume and Volatility. Financ Rev 36: 153-174. doi: 10.1111/j.1540-6288.2001.tb00024.x
    [21] Chordia T, Huh S-W, Subrahmanyam A (2007) The Cross-Section of Expected Trading Activity. Rev Financ Stud 30: 709-740.
    [22] Crouch RL (1970) A Nonlinear Test of the Random-Walk Hypothesis. Am Econ Rev 60: 199-202.
    [23] De Long B, Shleifer A, Summers L, Waldmann R (1990) Positive Feedback Investment Strategies and Destabilizing Rational Speculation. J Finance 45: 379-386. doi: 10.1111/j.1540-6261.1990.tb03695.x
    [24] Ehrbeck T, Waldman R (1996) Why are Professional Forecasters Biased? Agency Versus Behavioral Explanations. Q J Econ 111: 21-40.
    [25] English B (2008) When Knowledge Matters-Differential Effects of Available Knowledge in Standard and Basic Anchoring Tasks. Eur J Soc Psychol 38: 896-904. doi: 10.1002/ejsp.479
    [26] English B, Mussweiler T (2001) Sentencing under Uncertainty: Anchoring Effects in the Courtroom. J Appl Soc Psychol 31: 1535–1551. doi: 10.1111/j.1559-1816.2001.tb02687.x
    [27] Epps TW (1975) Security Price Changes and Transaction Volumes: Theory and Evidence. Am Econ Rev 65: 586–597.
    [28] Epps TW (1977) Security Price Changes and Transaction Volumes: Some Additional Evidence. J Financ Quant Anal 12: 141–146. doi: 10.2307/2330293
    [29] Epps TW, Epps ML (1976) The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis. Econometrica 44: 305-321. doi: 10.2307/1912726
    [30] Fisher KL, Statman M (2000) Cognitive Biases in Market Forecasts. J Portf Manage 27: 72-81. doi: 10.3905/jpm.2000.319785
    [31] Galinsky AD, Mussweiler T (2001) First Offers as Anchors: The Role of Perspective-Taking and Negotiator Focus. J Pers Soc Psychol 81: 657–669. doi: 10.1037/0022-3514.81.4.657
    [32] Gallant R, Rossi P, Tauchen G (1992) Stock Prices and Volume. Rev Financ Stud 5: 199-242. doi: 10.1093/rfs/5.2.199
    [33] Garfinkel JA, Sokobin J (2006) Volume, Opinion Divergence, and Returns: A Study of Post-Earnings Announcement Drift. J Account Res 44: 85-112. doi: 10.1111/j.1475-679X.2006.00193.x
    [34] Gervais S, Kaniel R, Mingelgrin DH (2001) The High Volume Return Premium. J Finance 56: 877–919. doi: 10.1111/0022-1082.00349
    [35] Glaser M, Weber M (2009) Which Past Returns Affect Trading Volume? J Financ Mark 12: 1-31. doi: 10.1016/j.finmar.2008.03.001
    [36] Griffin M, Nardari F, Stulz RM (2007) Do Investors Trade More When Stocks Have Performed Well? Evidence from 46 Countries. Rev Financ Stud 20: 905–951.
    [37] Gruen DK, Gizycki MC (1993) Explaining Forward Discount Bias: Is It Anchoring? Princeton University Woodrow Wilson School Discussion Paper in Economics 164.
    [38] Harris L (1983) The Joint Dislrihuiion of Speculative Prices and of Daily Trading Volume. Working Paper, University of Southern CA.
    [39] Harris M, Raviv A (1993) Differences of Opinion Make a Horse Race. Rev Financ Stud 6: 473-506. doi: 10.1093/rfs/5.3.473
    [40] Hirshleifer D, Subrahmanyam A, Titman S (1994) Security Analysis and Trading Patterns When Some Investors Receive Information before Others. J Finance 49: 1665-1698. doi: 10.1111/j.1540-6261.1994.tb04777.x
    [41] Hirshleifer D, Subrahmanyam A, Titman S (2006) Feedback and the Success of Irrational Investors. J Financ Econ 81: 311-338. doi: 10.1016/j.jfineco.2005.05.006
    [42] Holthausen RW, Verrecchia RE (1990) The Effect of Informedness and Consensus on Price and Volume Behavior. Account Rev 65: 191-208.
    [43] Hong H, Stein JC (1999) A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets. J Finance 54: 2143-2184. doi: 10.1111/0022-1082.00184
    [44] Hong H, Stein JC (2007) Disagreement and the Stock Market. J Econ Perspect 21: 109-128. doi: 10.1257/jep.21.2.109
    [45] Hong H, Yu J (2009) Gone Fishin': Seasonality in Trading Activity and Asset Prices. J Financ Mark 12: 672-702. doi: 10.1016/j.finmar.2009.06.001
    [46] Huddart S, Lang M, Yetman MH (2009) Volume and Price Patterns around a Stock's 52-Week Highs and Lows: Theory and Evidence. Manage Sci 55: 16-31. doi: 10.1287/mnsc.1080.0920
    [47] Israeli D (2015) Trading Volume Reactions to Earnings Announcements and Future Stock Returns. Working Paper, Interdisciplinary Center Herzliya.
    [48] Jacowitz KE, Kahneman D (1995) Measures of Anchoring in Estimation Tasks. Pers Soc Psychol Bull 21: 1161–1166. doi: 10.1177/01461672952111004
    [49] Jain PC, Joh G-H (1986) The Dependence between Hourly Prices and Trading Volume. Working Paper, The Wharton School, University of Pennsylvania.
    [50] Kahneman D, Slovic P, Tversky A (1982) Judgment under Uncertainty: Heuristics and Biases, New York: Cambridge University Press.
    [51] Kandel E, Pearson N (1995) Differential Interpretation of Public Signals and Trade in Speculative Markets. J Polit Econ 103: 831-872. doi: 10.1086/262005
    [52] Karpoff JM (1986) A Theory of Trading Volume. J Finance, 41: 1069-1087. doi: 10.1111/j.1540-6261.1986.tb02531.x
    [53] Karpoff JM (1987) The Relation between Price Changes and Trading Volume: A Survey. J Financ Quant Anal 22: 109-126. doi: 10.2307/2330874
    [54] Khan SU, Rizwan F (2008) Trading Volume and Stock Returns: Evidence from Pakistan's Stock Market. Int Rev Bus Res Pap 4: 151-162.
    [55] Kim O, Verrecchia RE (1991) Market Reaction to Anticipated Announcements. J Financ Econ 30: 273-309. doi: 10.1016/0304-405X(91)90033-G
    [56] Kim O, Verrecchia RE (1994) Market Liquidity and Volume around Earnings Announcements. J Account Econ 17: 41–67. doi: 10.1016/0165-4101(94)90004-3
    [57] Kim O, Verrecchia RE (1997) Pre-Announcement and Event-Period Private Information. J Account Econ 24: 395-419. doi: 10.1016/S0165-4101(98)00013-5
    [58] Kliger D, Kudryavtsev A (2010) The Availability Heuristic and Investors' Reaction to Company-Specific Events. J Behav Finance 11: 50-65. doi: 10.1080/15427561003591116
    [59] Kudryavtsev A, Cohen G (2010a) Illusion of Relevance: Anchoring in Economic and Financial Knowledge. Int J Econ Res 1: 86-101.
    [60] Kudryavtsev A, Cohen G (2010b) Anchoring and Pre-Existing Knowledge in Economic and Financial Settings. Am J Soc Manage Sci 1: 164-180.
    [61] Lakonishok J, Vermaelen T (1986) Tax-Induced Trading around Ex-Dividend Days. J Financ Econ 16: 287-319. doi: 10.1016/0304-405X(86)90032-2
    [62] Lee SB, Rui OM (2002) The Dynamic Relationship between Stock Return and Trading Volume: Domestic and Cross-Country Evidence. J Banking Finance 26: 51-78.
    [63] Leung TC, Tsang KP (2013) Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics, China Econ Rev 24: 42-54.
    [64] Llorente G, Michaely R, Saar G, Wang J (2002) Dynamic Volume-Return Relation of Individual Stocks. Rev Financ Stud 15: 1005-1047. doi: 10.1093/rfs/15.4.1005
    [65] Lo AW, Wang J (2006) Trading Volume: Implications of an Intertemporal Capiral Asset Pricing Model. J Finance 61: 2805–2840. doi: 10.1111/j.1540-6261.2006.01005.x
    [66] Mussweiler T (2001) The Durability of Anchoring Effects. Eur J Soc Psychol 31: 431–442. doi: 10.1002/ejsp.52
    [67] Mussweiler T, Strack F (1999a) Comparing is Believing: A Selective Accessibility Model of Judgmental Anchoring, In: Stroebe W, Hewstone M, European review of social psychology, Chichester: Wiley, 10: 135-167.
    [68] Mussweiler T, Strack F (1999b) Hypothesis-Consistent Testing and Semantic Priming in the Anchoring Paradigm: A Selective Accessibility Model. J Exp Soc Psychol 35: 136–164.
    [69] Mussweiler T, Strack F (2000) Numeric Judgment under Uncertainty: The Role of Knowledge in Anchoring. J Exp Soc Psychol 36: 495–518. doi: 10.1006/jesp.1999.1414
    [70] Ndjadingwe E, Radikoko I (2015) Investigating the Effects of Dividends Pay-out on Stock Prices and Traded Equity Volumes of BSE Listed Firms. Int J Innovation and Econ Dev 1: 24-37. doi: 10.18775/ijied.1849-7551-7020.2015.14.2002
    [71] Osborne MFM (1959) Brownian Motion in the Stock Market. Oper Res 1: 145-173.
    [72] Pathirawasam C (2011) The Relationship between Trading Volume and Stock Returns. J Competitiveness 3: 41-49.
    [73] Pisedtasalasai A, Gunasekarage A (2007) Causal and Dynamic Relationships among Stock Returns, Return Volatility and Trading Volume: Evidence from Emerging Markets in South-East Asia. Asia-Pac Financ Mark 14: 277-297. doi: 10.1007/s10690-008-9063-3
    [74] Plous S (1989) Thinking the Unthinkable: The Effects of Anchoring on Likelihood Estimates of Nuclear War. J Appl Soc Psychol 19: 67–91. doi: 10.1111/j.1559-1816.1989.tb01221.x
    [75] Remorov R (2014) Stock Price and Trading Volume during Market Crashes. Int J Mark Stud 6: 21-30.
    [76] Rutledge DJS (1984) Trading Volume and Price Variability: New Evidence on the Price Effects of Speculation, In: Peck AE, Selected Writings on Futures Markets: Research Directions in Commodity Markets, Chicago: Chicago Board of Trade, 237-251.
    [77] Saatccioglu K, Starks LT (1998) The Stock Price–Volume Relationship in Emerging Stock Markets: The Case of Latin America. Int J Forecast 14: 215–225. doi: 10.1016/S0169-2070(98)00028-4
    [78] Safvenblad P (2000) Trading Volume and Autocorrelation: Empirical Evidence from the Stockholm Stock Exchange. J Banking Finance 24: 1275–1287. doi: 10.1016/S0378-4266(99)00071-0
    [79] Schwert W (1989) Why Does Stock Market Volatility Change Over Time? J Finance 44: 1115-1155. doi: 10.1111/j.1540-6261.1989.tb02647.x
    [80] Simonson I, Drolet A (2004) Anchoring Effects on Consumers' Willingness-to-Pay and Willingness-to-Accept. J Consum Res 31: 681-690. doi: 10.1086/425103
    [81] Statman M, Thorley S, Vorkink K (2006) Investor Overconfidence and Trading Volume. Rev Financ Stud 19: 1531-1565. doi: 10.1093/rfs/hhj032
    [82] Strack F, Mussweiler T (1997) Explaining the Enigmatic Anchoring Effect: Mechanisms of Selective Accessibility. J Pers Soc Psychol 73: 437–446. doi: 10.1037/0022-3514.73.3.437
    [83] Tran QT, Mai YD (2015) Stock Market Reaction to Dividend Announcements from a Special Institutional Environment of Vietnamese Stock Market. Int J Econ Finance 7: 50-58.
    [84] Tversky A, Kahneman D (1973) Availability: A Heuristic for Judging Frequency and Probability. Cognit Psychol 4: 207–232. doi: 10.1016/0010-0285(73)90012-1
    [85] Tversky A, Kahneman D (1974) Judgment under Uncertainty: Heuristics and Biases. Sci 185: 1124-1131. doi: 10.1126/science.185.4157.1124
    [86] Varian HR (1989) Differences of Opinion in Financial Markets. In Financial Risk: Theory, Evidence and Implications: Proceedings of the 11th Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis, 3–37.
    [87] Verrecchia RE (1981) On the Relationship between Volume Reaction and Consensus of Investors: Implications for Interpreting Tests of Information Content. J Account Res 19: 271-283. doi: 10.2307/2490975
    [88] Westerfield R (1977) The Distribution of Common Stock Price Changes: An Application of Transactions Time and Subordinated Stochastic Models. J Financ Quant Anal 12: 743-765. doi: 10.2307/2330254
    [89] Wilson TD, Houston C, Etling KM, Brekke N (1996) A New Look at Anchoring Effects: Basic Anchoring and its Antecedents. J Exp Psychol: Gen 125: 387–402. doi: 10.1037/0096-3445.125.4.387
    [90] Wood RA, McInish TH, Ord KJ (1985) An Investigation of Transactions Data for NYSE Stocks. J Finance 40: 723-739. doi: 10.1111/j.1540-6261.1985.tb04996.x
    [91] Xu P, Rui OM, Kim S (2002) Risk Shift Following Dividend Change Announcement: The Role of Trading. Rev Quant Finance Account 19: 45-63. doi: 10.1023/A:1015778208868
    [92] Ying CC (1966) Stock Market Prices and Volumes of Sales. Econometrica 34: 676-686. doi: 10.2307/1909776
    [93] Ziebart DA (1990) The Association between Consensus of Beliefs and Trading Activity Surrounding Earnings Announcements. Account Rev 65: 477-488.
    [94] Zielonka P (2004) Technical Analysis as the Representation of Typical Cognitive Biases. Int Rev Financ Anal 13: 217-225.
  • Reader Comments
  • © 2017 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)
通讯作者: 陈斌, bchen63@163.com
  • 1. 

    沈阳化工大学材料科学与工程学院 沈阳 110142

  1. 本站搜索
  2. 百度学术搜索
  3. 万方数据库搜索
  4. CNKI搜索
Quantitative Finance and Economics
3.2 0.3

Metrics

Article views(5869) PDF downloads(1172) Cited by(4)

Preview PDF
Download XML
Export Citation
Article outline

Figures and Tables

Tables(5)

Other Articles By Authors

Related pages

Tools

/

DownLoad:  Full-Size Img  PowerPoint
Return
Return

Catalog