6. Conclusion
Using an alternative measure of volume shocks, this article investigates whether a volume shock effect exists in the Australian equity market. The study provides out-of-sample evidence to the literature and contributes to the understanding of investor behaviors in the Australian market. Academically, the link between volume shocks and stock returns will advance our understanding on the risk-return relation. Practically, trading volume has long been used in technical analysis and the findings of this paper are of interest to technical analysts, since extreme volume shocks could be used as a signal in market timing.
At the portfolio level, we show that an investment strategy that buys stocks experiencing high volume shocks and sells stocks experiencing low volume shocks generates a significant return premium. However, this return premium is strongest over a short investment horizon. Over the long run, there is a reversal in returns associated with extreme volume shocks. The volume shock effect is also observed at the individual stock level. More importantly, the effect is robust after controlling for other firm characteristics that are known to affect stock returns.
