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The cross-section of expected trading activity

journal contribution
posted on 2007-05-01, 00:00 authored by Tarun ChordiaTarun Chordia, S-W Huh, A Subrahmanyam
This article studies cross-sectional variations in trading activity for a comprehensive sample of NYSE/AMEX and Nasdaq stocks over a period of about 40 years. We test whether trading activity depends upon the degree of liquidity trading, the mass of informed traders, and the extent of uncertainty and dispersion of opinion about fundamental values. We hypothesize that liquidity (or noise) trading depends both on a stock's visibility and on portfolio rebalancing needs triggered by past price performance. We use firm size, age, price, and the book-to-market ratio as proxies for a firm's visibility. The mass of informed agents is proxied by the number of analysts whereas forecast dispersion and firm leverage proxy for differences of opinion. Earning volatility and absolute earning surprises proxy for uncertainty about fundamental values. Overall, the results provide support for theories of trading based on stock visibility, portfolio rebalancing needs, differences of opinion, and uncertainty about fundamental values.

History

Journal

Review of financial studies

Volume

20

Issue

3

Pagination

709 - 740

Publisher

Oxford University Press

Location

Oxford, Eng.

ISSN

0893-9454

eISSN

1465-7368

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2006, The Authors

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