Expected return, volume, and mispricing

Yufeng Han; Dashan Huang; Dayong Huang; Guofu Zhou

doi:10.1016/j.jfineco.2021.05.014

Expected return, volume, and mispricing

Yufeng Han, Dashan Huang, Dayong Huang, Guofu Zhou

Research output: Contribution to journal › Article › peer-review

45 Scopus citations

Abstract

We find that expected return is related to trading volume positively among underpriced stocks but negatively among overpriced stocks. As such, trading volume amplifies mispricing. Our results are robust to alternative mispricing and trading volume measures, alternative portfolio formation methods, and controlling for variables that are known to have amplification effects on mispricing. By attributing trading volume to investor disagreement, we show that our results are consistent with the recent theoretical model of Atmaz and Basak (2018) in that investor disagreement predicts stock returns conditional on expectation bias.

Original language	English
Pages (from-to)	1295-1315
Number of pages	21
Journal	Journal of Financial Economics
Volume	143
Issue number	3
DOIs	https://doi.org/10.1016/j.jfineco.2021.05.014
State	Published - Mar 2022

Keywords

Disagreement
Expectation bias
Mispricing
Trading volume
Turnover

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10.1016/j.jfineco.2021.05.014

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abstract = "We find that expected return is related to trading volume positively among underpriced stocks but negatively among overpriced stocks. As such, trading volume amplifies mispricing. Our results are robust to alternative mispricing and trading volume measures, alternative portfolio formation methods, and controlling for variables that are known to have amplification effects on mispricing. By attributing trading volume to investor disagreement, we show that our results are consistent with the recent theoretical model of Atmaz and Basak (2018) in that investor disagreement predicts stock returns conditional on expectation bias.",

keywords = "Disagreement, Expectation bias, Mispricing, Trading volume, Turnover",

author = "Yufeng Han and Dashan Huang and Dayong Huang and Guofu Zhou",

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AU - Huang, Dashan

AU - Huang, Dayong

AU - Zhou, Guofu

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N2 - We find that expected return is related to trading volume positively among underpriced stocks but negatively among overpriced stocks. As such, trading volume amplifies mispricing. Our results are robust to alternative mispricing and trading volume measures, alternative portfolio formation methods, and controlling for variables that are known to have amplification effects on mispricing. By attributing trading volume to investor disagreement, we show that our results are consistent with the recent theoretical model of Atmaz and Basak (2018) in that investor disagreement predicts stock returns conditional on expectation bias.

AB - We find that expected return is related to trading volume positively among underpriced stocks but negatively among overpriced stocks. As such, trading volume amplifies mispricing. Our results are robust to alternative mispricing and trading volume measures, alternative portfolio formation methods, and controlling for variables that are known to have amplification effects on mispricing. By attributing trading volume to investor disagreement, we show that our results are consistent with the recent theoretical model of Atmaz and Basak (2018) in that investor disagreement predicts stock returns conditional on expectation bias.

KW - Disagreement

KW - Expectation bias

KW - Mispricing

KW - Trading volume

KW - Turnover

UR - https://www.scopus.com/pages/publications/85107875511

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JF - Journal of Financial Economics

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ER -

Expected return, volume, and mispricing

Abstract

Keywords

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