Abstract
We propose a new mechanism with which we explain an exceptional phenomenon in the Korean stock market, wherein the post-event return of an abnormally low-volume stock is larger than that of an abnormally high-volume stock, in contrast to what happens in other major stock markets. This mechanism is a combination of two market characteristics: one is the mean-reversion of trading volume; the other is the dominance of stocks with a positive correlation between return and change in trading volume. Using evidence from the Korean stock market, we show that the return generated by this mechanism has a highly concentrated distribution with a negative average and that the value has a scale higher than that of positive returns generated by other factors. We conclude that our suggested mechanism can explain the low-volume return premium in the Korean stock market. This finding presents a new way to explain how trading volume change affects future returns.
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