Evaluating the relationship between abnormal trading volume and price movement in U.S. stock markets

Abstract

Ever since the formation of stock exchanges, traders and investors alike have relied on various techniques in an attempt to accurately predict imminent price movements with the goal of capitalizing on market fluctuations. One of the simplest, yet most powerful, technical indicators used to gauge the strength of a price swing is the trading volume metric. This paper investigates the informational content of unusual trading volume and how it influences market prices in U.S. stock markets by analyzing the subsequent price changes in: (1) equities which exhibited abnormal trading volume during the month of October 2017 and; (2) peculiar index trading activity seen between 2000-2018. The text explores the presently available literature on the subject at hand and essentially expands on the well-known studies of Ying (1966) and Gervais et al. (2001) to analytically evaluate the high-volume price premium with the use of statistical tests on the collected data sample. The results achieved demonstrate that abnormal trading volume in indices tend to be followed by price hikes in the short-term, although not all observations were statistically significant, while the evaluation of equities revealed that trading order imbalance and consequent price changes are inversely related to a great degree. The empirical evidence acquired supports the hypothesis that stocks recording abnormal volume together with a price decline continue to fall in price in the short-term but rejects the hypothesis that extreme volume with a price increase signals a surging bull market. The stocks that registered a price increase alongside abnormal volume fell by an average of 4.17% after one week and in total by 7.68% after a period of eight weeks. The price-volume relation was also studied relative to other stock characteristics such as the “Free Cash Flow Yield Effect” and the “Exchange-Effect”.