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School of Business | Department of Finance | Finance | 2015
Thesis number: 14072
Relation between past stock market returns and trading volume in Europe
Author: Aarnikoivu, Monariina
Title: Relation between past stock market returns and trading volume in Europe
Year: 2015  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; financing; osakemarkkinat; stock markets; sijoittajat; investors; tuotto; rate of return; syklit; cycles
Pages: 59
Full text:
» hse_ethesis_14072.pdf pdf  size:8 MB (7656691)
Key terms: overconfidence; European stock exchanges; trading volume; stock turnover; past returns; financial crisis; market fragmentation; vector autoregression; impulse response function

The high observed trading volume can be explained by the matter that investors are overconfident about their ability to value and trade stocks. The increasing returns make investors overestimate their trading skills and thus increase their trading. In contrary, decreasing returns make investors decrease their trading. Thus the observed trading volume varies with the level of investor overconfidence. In this thesis, I study whether the investor overconfidence hypothesis holds in the European stock market in the 2000s and which factors have affected the trading volumes of the European national stock exchanges. This study follows the previous research of Statman, Thorley, and Vorkink (2006).


The data set used in the study consists of the stock turnover and daily index value data of fourteen European stock indexes from June 2001 to December 2014. The turnover is calculated by dividing the amount of stocks traded in each index by the total amount of stocks underlying each index. The daily data is used on the monthly and weekly level in the study, and the indexes are studied both separately and as a single pooled data set. The full period is also divided into two subsamples to observe the differences between pre- and post-crisis periods around the year 2008. I use the vector autoregression methodology to observe how lagged returns are affecting the current turnover but the methodology also gives results to other combinations of these two variables. In addition, I run impulse response functions for each time period and index to observe how a shock of one standard deviation in return affects the contemporaneous turnover and how many months the turnover is affected by this shock.


The results of the study indicate that for the full period from 2001 to 2014 the support for the overconfidence hypothesis is weak. However, by dividing the full period into two subsamples to represent the periods before and after the financial crisis of 2008, I find that from 2001 to 2008 the stock turnover is positively related to lagged returns for many months but this relation does not hold during the period after the crisis. Due to this observation, I will also review how the stock market conditions have changed in Europe after the crisis. The two main reasons for the trading to decrease in national stock exchanges despite the market catching up after the crisis are the market regulation and fragmentation.
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