Abstract
Recent research has found that price momentum and trading volume appear to predict subsequent stock returns in the U.S. market and that they seem to do so in a nonlinear fashion. Specifically, the effect of momentum appears more pronounced among high-volume stocks than among low-volume stocks. This effect would suggest the existence of an exploitable deviation from market efficiency. We argue that this phenomenon is a result of the underreaction of investors to earnings news—an effect that is most pronounced for high-growth companies. We show that, after earnings-related news and a stock's growth rate have been controlled for, the interaction between momentum and volume largely disappears.
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