HOURLY RETURNS, VOLUME, TRADE SIZE, AND NUMBER OF TRADES

Previous research identifies a causal relationship between returns and trading volume. But volume has two components: number of trades and number of shares per trade. In this paper the relationship between each of these volume components and returns is examined and the number of trades is found to be the dominant component. Results show that return activity in a period is associated with the level of trading frequency in a subsequent period and also with the number of shares in a subsequent period. This is consistent with small traders reacting to returns while professional traders largely ignore previous returns in their trading.