Impact of Trading Volume on Next Day Stock Returns in the DJIA 2007-2009

It is prevalent among investment analysts to use high trading volume as a positive selection condition. But the research findings in the finance literature are not clear on the predictive validity or even the direction of the impact of trading volume on future returns. One stream of research finds that high trading volume is associated with information asymmetry or differences in beliefs between traders, suggesting greater uncertainty in stock returns. A second stream of research finds that high trading volume is attributed to informed trading, suggesting greater certainty that stock returns will be maintained. A third stream of research, supporting the efficient market hypothesis, rejects the predictive validity of using historical information. These opposing viewpoints are evaluated by examining the behavior of the DJIA stock portfolio between the years 2007 to 2009. The analysis supports the findings of the “asymmetric information” hypothesis and has important implications with respect to investment strategies.