Expected return, volume, and mispricing

• Main Authors: HAN, Yufeng, HUANG, Dashan, HUANG, Dayong, ZHOU, Guofu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: Turnover; Trading volume; Mispricing; Disagreement; Expectation bias; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6898; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7897/viewcontent/SSRN_id3171375.pdf
• Institution: Singapore Management University

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.