Trading volume and Arbitrage

Serge Darolles (1) , Gaëlle Le Fol (1)

1 DRM - Dauphine Recherches en Management

Decomposing returns into market and stock specific components is common practice and forms the basis of popular asset pricing models. What about volume? Can volume be decomposed in the same way as returns? Lo and Wang (2000) suggest such a decomposition. Our paper contributes to this literature in two different ways. First, we provide a model to explain why volumes deviate from the benchmark. Our interpretation is in terms of arbitrage strategies and liquidity. Second, we propose a new efficient screening tool that allows practitioners to extract specific information from volume time series. We provide an empirical illustration of the relevance and the possible uses of our approach on daily data from the FTSE index from 2000 to 2002.

Mots clés: Liquidity; Market portfolio

Mots clés: Volume; Arbitrage

Domaines: Gestion et management

Serge Darolles, Gaëlle Le Fol. Trading volume and Arbitrage. GSTF : Journal on Business Review, 2014, 3 (3). ⟨hal-01632841⟩