Volatility of trading volume and expected stock returns – Empirical evidence from the Finnish stock market

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School of Business | Master's thesis
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The relationship between trading volume and expected stock returns has been extensively studied in the finance literature. Volatility of trading volume, on the other hand, has received much less attention, despite its significance for stock liquidity and its volatility. The high volatility of trading volume can be seen as an additional risk factor, making it very interesting as a research topic. The most significant study related to the volatility of trading volume and its effects on stock returns has been presented by Chordia, Subrahmanyam and Anshuman (2001). According to their study, U.S. stocks with high volatility of trading activity yield less than stocks with low volatility of trading activity. This observation is special because, according to traditional financial theory, the results should be reversed, in which case the investor would be compensated for the high volatility of trading volume, which can be seen as a risk factor. In their research, they use the trading volume and the share turnover ratio as measures of trading activity. This study is the first to research the same phenomenon in the Finnish stock market. My goal is to present the existence of the phenomenon in Finland for the first time with Finnish stock data and to compare the results with the above-mentioned study. I analysed data from the Refinitiv Eikon database using the methods used by Chordia, Subrahmanyam, and Anshuman (2001), mainly by Fama-Macbeth (1973) regressions, to make the study results comparable. The results of my research are significant: in my 2002–2021 time series, I present the finding that Finnish equities perform better if the volatility of trading activity is high rather than low. In addition, the results using the trading volume as a measure of trading activity are statistically significant. The observation of a positive correlation between the volatility of trading activity and stock returns is remarkable, as it is the opposite finding to that observed for U.S. equities in the above-mentioned study. My research brings new results to the existing literature on the Finnish stock market.
Thesis advisor
Puttonen, Vesa
volatility of trading activity, stock returns, trading activity, stock market
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