Source: Lee, C. M. C. & Swaminathan, B. (2000) · Journal of Finance 55(5), 2017–2069
TL;DR
Past trading volume (turnover) predicts the magnitude and persistence of price momentum and signals where a stock sits in its "momentum life cycle." Over 1965–1995, buying high-volume winners and selling high-volume losers beats a plain price-momentum strategy by 2–7% per year in the intermediate term (mainly because low-volume losers rebound). In the long term, buying low-volume winners and selling high-volume losers shows continuation up to three years, while buying high-volume winners and selling low-volume losers reverses in years two and three. High-volume stocks behave like glamour stocks; low-volume stocks behave like neglected/value stocks.
What anomaly it documents
Predictor: the interaction of past intermediate-term returns (momentum, 3–12 months) with past trading volume (average daily turnover = shares traded / shares outstanding).
Direction: intermediate-term momentum is stronger among high-volume firms; long-horizon return continuation vs reversal depends on the winner/loser × high/low-volume cell.
Mechanism (life cycle): stocks rotate through early-stage (low-volume, neglected) and late-stage (high-volume, glamour) phases; volume indicates the imminence of a reversal.
OSAP predictor: related to momentum × turnover signals.
How it is constructed
Double sort: rank stocks on past returns (e.g., past 6–12 months) and independently on average daily turnover; form winner/loser × low/high-volume portfolios.
Universe: NYSE/AMEX common stocks, 1965–1995.
Horizon: track returns over 1–5 years to map the transition from momentum to reversal; the intermediate-term hedge (high-vol winners minus high-vol losers) is the headline strategy.
Evidence and replication
Strategy
Result
Source
Intermediate-term: long high-vol winners / short high-vol losers
beats plain momentum by 2–7%/year (1965–1995)
this paper
Long-term: long low-vol winners / short high-vol losers
continuation up to 3 years
this paper
Long-term: long high-vol winners / short low-vol losers
reverses in years 2–3
this paper
Results are not explained by firm size, stock price, or the Fama–French (1993) three-factor model.
Why it might work
Behavioral: volume proxies for investor interest/attention and disagreement; underreaction in early life-cycle stages later overcorrects.
Fundamentals: high-volume losers show subsequent ROE deterioration and low-volume winners more positive ROE changes — consistent with mispriced expectations being corrected.
Limitations and risks
Volume's meaning has shifted with market structure (HFT, ETFs, decimalization) since the 1965–1995 sample.
Double sorts thin out portfolios; turnover and trading costs matter for the multi-leg strategy.
Distinguishing the behavioral life-cycle story from risk is not settled.
Key references
Lee, C. & Swaminathan, B. (2000) — Price Momentum and Trading Volume — Journal of Finance
Jegadeesh, N. & Titman, S. (1993) — Returns to Buying Winners and Selling Losers — Journal of Finance
Gervais, S., Kaniel, R. & Mingelgrin, D. (2001) — The High-Volume Return Premium — Journal of Finance
Provenance: verified/generated from the paper's full text.
