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RFS Advance Access originally published online on July 1, 2006
Review of Financial Studies 2007 20(3):709-740; doi:10.1093/rfs/hhl014
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

The Cross-Section of Expected Trading Activity

Tarun Chordia
Goizueta Business School, Emory University

Sahn-Wook Huh
Faculty of Business, Brock University

Avanidhar Subrahmanyam
The Anderson School University of California at Los Angeles

Address correspondence to Avanidhar Subrahmanyam, Anderson School, University of California at Los Angeles, 110 Westwood Plaza, Los Angeles, CA 90095-1481, or e-mail: subra{at}anderson.ucla.edu.

This article studies cross-sectional variations in trading activity for a comprehensive sample of NYSE/AMEX and Nasdaq stocks over a period of about 40 years. We test whether trading activity depends upon the degree of liquidity trading, the mass of informed traders, and the extent of uncertainty and dispersion of opinion about fundamental values. We hypothesize that liquidity (or noise) trading depends both on a stock’s visibility and on portfolio rebalancing needs triggered by past price performance. We use firm size, age, price, and the book-to-market ratio as proxies for a firm’s visibility. The mass of informed agents is proxied by the number of analysts whereas forecast dispersion and firm leverage proxy for differences of opinion. Earning volatility and absolute earning surprises proxy for uncertainty about fundamental values. Overall, the results provide support for theories of trading based on stock visibility, portfolio rebalancing needs, differences of opinion, and uncertainty about fundamental values.


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