Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model

Authors: LO, ANDREW W.; WANG, JIANG

Source: The Journal of Finance, Volume 61, Number 6, December 2006 , pp. 2805-2840(36)

Publisher: Blackwell Publishing

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Abstract:

We derive an intertemporal asset pricing model and explore its implications for trading volume and asset returns. We show that investors trade in only two portfolios: the market portfolio, and a hedging portfolio that is used to hedge the risk of changing market conditions. We empirically identify the hedging portfolio using weekly volume and returns data for U.S. stocks, and then test two of its properties implied by the theory: Its return should be an additional risk factor in explaining the cross section of asset returns, and should also be the best predictor of future market returns.

Document Type: Research article

DOI: 10.1111/j.1540-6261.2006.01005.x

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