Past price changes and current trading volume

Abstract

18 .^ B 0th price and trading volume of common stock are believed to respond promptly to new information. There are, however, no comparable theoretical arguments for a relationship between past information and current trading volume. It is possible, for example, that investors responding to tax incentives may seek to realize capital losses or to avoid realizing gains months after release of information that generated the gains or losses. Thus evidence that this month's trading volume is systematically related to events in previous months can provide insights into further motives for trading. This study uses price patterns in previous months to explain trading volume in the current month. We find that past price changes do influence current incentives to trade for both tax and non-tax motives. Volume tends to be higher than normal for winners (stocks that performed well in the prior period) and lower than normal for losers. The influence of tax-related motives is shown by seasonal variations in the relationship between past price changes and volume. Specifically, the trading volume of losers is higher than normal in December, and winners show a relatively higher trading volume in January. Our methodology does not permit us to distinguish clearly among the various non-tax motives for trading. Some of these motives are consistent with customary ideas about rational behavior; others are not. This study is based on Lakonishok and Smidt [198#6], which can be consulted for technical details [