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RFS Advance Access published online on July 1, 2006
Review of Financial Studies, 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

Article

The Cross-Section of Expected Trading Activity

Tarun Chordia 1, Sahn-Wook Huh 2, and Avanidhar Subrahmanyam 3 *
1 Goizueta Business School, Emory University, Atlanta, GA 30322
2 Faculty of Business, Brock University, St. Catharines, Ontario, Canada L2S 3A1
3 The Anderson School, 110 Westwood Plaza, University of California at Los Angeles, Los Angeles, CA 90095-1481

* To whom correspondence should be addressed.
Avanidhar Subrahmanyam, E-mail: subra{at}anderson.ucla.edu


  Abstract

This paper 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, while forecast dispersion and firm leverage proxy for differences of opinion. Earnings volatility and absolute earnings 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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