Research Program in Finance

This paper reconsiders return-volume dependence for the U.S. and six international equity markets. We contribute to previous work by proposing surprise volume as a new proxy for private information flow and apply extreme value theory in studying dependence for large volume and return, i.e. under situations of market stress. Results from a GARCH-M model indicate that surprise volume is superior in explaining conditional variance and reveals a positive market risk premium. Under conditions of market stress, the return-volume dependence is weaker, albeit mostly significant. The results for the U.S. market are most pronounced in that surprise volume explains ARCH- as well as leverage-effects and, under market stress, the return-volume dependence remains significant and symmetric. For the European and Asian markets, however, the dependence is weaker with asymmetry under market stress, i.e. small minimal returns show lower volume dependence than large maximal returns. We argue that our results are more consistent with a Gennotte and Leland (1990) misinterpretation hypothesis for market crashes than with cascade or behavioral explanations which associate high volume with steep price declines.