Persistence or reversal? The effects of abnormal trading volume on stock returns

Having established that portfolios derived from the extreme deciles of Abnormal Trading Volume (ATV) generate positive (negative) returns in the short (long) run, we devise a measure of Persistence in ATV (PATV) and provide an investor sentiment-based explanation for this return predictability. PATV leads to portfolio returns continuing to drift in the short run. However, the trading volumes of individual stocks in the portfolios gradually revert to their long-run means, accompanied by portfolio returns falling and turning negative as mispricing is corrected. We dismiss liquidity shocks, continuing overreaction, and investor disagreement and attention as explanations for the observed return predictability.