The effect of trading volumes on stock returns following large price moves

* The author is from The Economics and Management Department, The Max Stern Yezreel Valley Academic College, Emek Yezreel 19300, Israel, andreyk@yvc.ac.il. JEL CLASSIFICATION: G11, G14, G19 ABSTRACT: The study analyses the correlation between abnormal trading volumes accompanying large stock price changes and subsequent stock price dynamics. Assuming that abnormal trading volume associated with a large price move may serve as an indication of the extent of the immediate stock price reaction to the underlying company-specific shock, I suggest that large price moves accompanied by relatively high (low) abnormal trading volumes may be followed by price reversals (drifts). Analysing a large sample of major daily stock price moves and defining the latter according to a number of alternative proxies, I document that both large price increases and decreases accompanied by high (low) abnormal trading volumes are followed by significant price reversals (drifts) on each of the next two trading days and over fiveand twenty-day intervals following the initial price move, the magnitude of the reversals (drifts) increasing over longer post-event windows. The effect remains significant after accounting for additional company-specific (size, CAPM beta, historical volatility) and event-specific (stock’s absolute return on the event day) factors, and is robust to different methods of calculating abnormal returns and to different sample filtering criteria.