High-Volume Return Premium And Volume-Liquidity Premium

Abstract

This study investigates the interaction of volume-liquidity premium and high-volume return premium by simultaneously considering two factors that significantly impact future stock returns: trading volume norms and trading volume extremes. The study finds that high-volume return premium does exist. However, the high-volume return premium behaves differently for liquid and illiquid stocks. The high-volume return premium disappears very quickly for illiquid stocks, while it persists much longer for highly liquid stocks. The study also shows evidence that supports volume-liquidity premium. But the volume-liquidity premium behaves differently after stocks experience an extremely high/low volume shock. The volume-liquidity premium only exists for small size stocks after an extremely low volume shock, but this volume-liquidity premium totally disappears for stocks experiencing an extremely high volume shock.