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Can Trading Volume Validate Extreme Price Movements in the Age of Higher Algorithmic Trading Activities?

Yu-Jung L. Avis, Chingfu Chang and Dandan Wu
The Journal of Trading Spring 2017, 12 (2) 73-87; DOI: https://doi.org/10.3905/jot.2017.12.2.073
Yu-Jung L. Avis
is an associate professor of finance in the Huether School of Business at the College of Saint Rose in New York, NY.
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  • For correspondence: avisy@strose.edu
Chingfu Chang
is an assistant professor of accounting in the College of Commerce at National Chengchi University in Taiwan.
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  • For correspondence: cfchang3@nccu.edu.tw
Dandan Wu
is an assistant professor of finance in the Huether School of Business at the College of Saint Rose in New York, NY.
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  • For correspondence: wud@strose.edu
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Abstract

We take the perspective of the practitioner who focuses on following the longitudinal performance of specific stocks and investigate whether volume may provide guidance on days of extreme price movements. For days of extreme price increases (the winners) and extreme price decreases (the losers), we show that extreme low volume is associated with future return reversal, whereas extreme high volume does not necessarily lead to future return persistence. We look at daily data from 1989 to 2014, and we consider 2004 to be the year when algorithmic trading activities began to intensify. We find that the usefulness of extreme low volume in repudiating extreme price movements has been diminishing since 2004. To the extent that extreme low volume may still be applied to repudiate extreme price movements, a practitioner may limit his or her scope to the low-volume winners and losers of small capitalization. In addition, we use Chinese data from 1992 to 2014 to replicate the tests. We find that the same characteristics are not shown there, indicating a lack of universality of the conclusions we derived from the U.S. data.

TOPICS: Statistical methods, tail risks

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The Journal of Trading: 12 (2)
The Journal of Trading
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Can Trading Volume Validate Extreme Price Movements in the Age of Higher Algorithmic Trading Activities?
Yu-Jung L. Avis, Chingfu Chang, Dandan Wu
The Journal of Trading Mar 2017, 12 (2) 73-87; DOI: 10.3905/jot.2017.12.2.073

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Can Trading Volume Validate Extreme Price Movements in the Age of Higher Algorithmic Trading Activities?
Yu-Jung L. Avis, Chingfu Chang, Dandan Wu
The Journal of Trading Mar 2017, 12 (2) 73-87; DOI: 10.3905/jot.2017.12.2.073
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    • Abstract
    • HYPOTHESES
    • THE TESTS AND RESULTS
    • TESTS ON DATA FROM CHINA
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • APPENDIX D
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