Abstract
Many investors in equity markets follow trading styles based on stock characteristics like firm size or momentum. Because stocks' characteristics change over time, style investors must rebalance their portfolios to avoid style drift. In this paper, I analyze how the rebalancing trades of style traders affect the cross-section of trading volume. Specifically, I estimate, using mutual fund stock holdings data, how the propensity to sell a stock depends on recent changes in stock characteristics. It turns out to be most strongly related to changes in firm size, value, and momentum characteristics. The fitted values of the propensity-to-sell model explain a significant portion of the cross-sectional variation in total trading volume, controlling for other determinants of volume and using instrumental variables to deal with the endogeneity of stock characteristics. The results suggest that style investing is an important source of trading volume.
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