Persistence or Reversal? The Effects of Abnormal Trading Volume on Stock Returns

After documenting that monthly portfolios constructed according to the extreme deciles of Abnormal Trading Volume (ATV) generate positive (negative) returns in the short (long) run, we introduce a measure of ATV persistence and offer an explanation for this return predictability based on investor sentiment. ATV persistence leads portfolio returns to keep drifting in the short run. However, the ATV of individual stocks in the portfolio gradually reverts to the long-run mean, accompanied by portfolio returns falling and turning negative as mispricing is corrected. We also invalidate the theories of liquidity shocks and continuing overreaction in explaining the observed return predictability