Expected earnings, volume and mispricing – 我的笔记本

Expected earnings, volume and mispricing


Expected returns are positively related to the trading volume of undervalued stocks and negatively related to the trading volume of overvalued stocks. As a result, trading volume amplifies mispricing. The results are robust after substituting measures of mispricing and trading volume, portfolio construction methods, and controlling for variables that already have a magnifying effect on mispricing.

Research Background

Trading volume plays an important role in price discovery, risk diversification and liquidity provision in the stock market. Trading volume affects stock returns as it correlates with investor divergence, volatility, liquidity, investor attention, private information, and more.

Research design

Main Test: Trading Volume and Mispricing (Volume Amplification Effect)

Mispricing is concentrated in high-volume stocks, as expected returns are positively correlated with the volume of undervalued stocks and negatively correlated with the volume of overvalued stocks.

Mispricing affects the relationship between trading volume and yield, and this effect is concentrated in a portfolio of stocks with high trading volume.

Robustness check

  1. Mispriced surrogate indicators
  2. Controlling for variables that have a magnifying effect on mispricing

Mechanism check

  1. Theoretical Analysis: Anticipation Bias and Divergences
  2. robustness check
    • Indicator robustness
    • The missing variable problem: exogenous natural experiments
    • other alternative interpretations

Economic significance

The transaction volume amplification effect is still significant relative to SY4, but it is weaker economically and statistically, because the measurement of the transaction volume amplification effect in this paper is related to MISP and is therefore also affected by potential factors. If this paper uses other indicators of mispricing, such as firm-level alpha in the SY4 model, the volume amplification effect will be stronger. In conclusion, from an investment standpoint, trading volume plus a mispricing indicator can identify more undervalued and overvalued stocks with higher economic value than the original factor traded.


The price-volume relationship is a fundamental but still unresearched area of asset pricing. This paper finds that the price-volume relationship of stocks is different under different mispricing levels. The price-volume relationship is positive for undervalued stocks and negative for overvalued stocks. As a result, mispricing is concentrated in heavily traded stocks. This paper argues that if trading volume reflects investor divergence and mispricing reflects investor expectations bias, the results of this paper can be explained by the theoretical model of Atmaz and Basak (2018). The empirical results of this paper not only help to reconcile many existing studies, but go beyond Atmaz and Basak (2018) to call for new asset pricing models that explicitly analyze transaction volume, mispricing, IVOL, and other economic variables to enrich consideration volume understanding of relationships. The challenge for future research is to explore what models can generate volume amplification effects and explain the associated anomalies. In addition, the method in this paper can also be used to study the price-volume relationship of international stock markets and other assets such as bonds and currencies.

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