Returns on volume-based portfolios in the Helsinki Stock Exchange
1University of Oulu, Oulu Business School, Department of Finance, Finance
|Online Access:||PDF Full Text (PDF, 2.1 MB)|
|Persistent link:|| http://urn.fi/URN:NBN:fi:oulu-201405211442
|Publish Date:|| 2014-06-02
|Thesis type:||Master's thesis
More than fifty variables have been shown to have predictive power over expected returns. In a sample of NYSE/AMEX stocks, Lee and Swaminathan (2000) show that share turnover is negatively related to future returns. Also Wang and Chin (2004) find that portfolios of low trading volume outperform portfolios of high trading volume with the difference in returns more pronounced for past winners than for past losers in a sample of Shanghai and Shenzhen stocks. Motivated by these findings, I extend the study on the volume–return dynamics using data from the Helsinki Stock Exchange. In this paper, I study the informational content present in trading volume in the prediction of expected returns. More importantly, I examine the profitability of various volume based portfolios.
Following the methodology of Jegadeesh and Titman (1993) and inspired by Wang and Chin (2004), I form portfolios based on past returns and trading volume over different formation and holding periods and examine the profitability of various volume based portfolio strategies over the period from 1999 to 2010.
I find that conditional on past returns, high-volume stocks outperform low volume stocks for most formation and holding periods. The volume discount, that is the average monthly returns difference between low volume portfolios and high-volume portfolios, is largest in magnitude for the 6 x 12 strategy for winners portfolios at -2.17% (t-statistics = −4.70). The results are robust to risk adjustment relative to the Fama and French (1993) three factor model. The results are not entirely consistent with the existing literature on the volume-return dynamics. While the results suggest that investing in high-volume stocks and shorting portfolios of low-volume stocks is a profitable strategy, implementing such trading strategy should be done with caution because of the special nature of the Helsinki Stock Exchange.
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