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Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model
Author(s) -
LO ANDREW W.,
WANG JIANG
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.01005.x
Subject(s) - capital asset pricing model , market portfolio , portfolio , economics , consumption based capital asset pricing model , financial economics , replicating portfolio , hedge , security market line , asset (computer security) , basis risk , econometrics , portfolio optimization , stock market , ecology , paleontology , computer security , horse , computer science , biology
We derive an intertemporal asset pricing model and explore its implications for trading volume and asset returns. We show that investors trade in only two portfolios: the market portfolio, and a hedging portfolio that is used to hedge the risk of changing market conditions. We empirically identify the hedging portfolio using weekly volume and returns data for U.S. stocks, and then test two of its properties implied by the theory: Its return should be an additional risk factor in explaining the cross section of asset returns, and should also be the best predictor of future market returns.