The Impact of Trading Volume on Portfolios Effective Time Formation/Holding

Periods Based on Momentum Investment Strategies

Abstract

This paper analyzes momentum investment strategies based on past returns to evaluate the impact of trading volume on the portfolio effective time formation/holding period on the Canadian Stock Market. Our main purpose is to evaluate the information content of trading volume and find out if it has a significant effect on the optimal time formation/holding reported in Assogbavi and Leonard (2008). Utilizing variant models of Jegadeesh and Titman (1993) and Lee and Swaminathan (2000), we evaluate the effective time formation/holding period using both past return and trading volume.  We find evidence that, taking into consideration trading volume in momentum investment strategies, improves the return of the effective portfolio and shortens its time formation and holding period between 1996 to 2004 compared to a strictly price momentum strategy.  These results are consistent with other findings regarding information content of trading volume in designing investment strategies.  For investors who base their portfolio construction on momentum investment strategies, this finding suggests that it would be wise to incorporate past trading volume in their selection process.