Using Turnover and Next-Day Volatility to Detect Informed Trading

Summary

This research summary proposes that trading activity can reveal information about informed traders. It reports a positive relationship between turnover and next-day share-price volatility: unusually active trading may precede either a sharp rise or a sharp fall, as informed participants enter or exit positions. The strength of the turnover-volatility relationship is treated as a possible indicator of how much information is being reflected in trading, and therefore of adverse selection risk for other investors.

The report builds a composite FR stock-selection factor from price-volume interaction. The summary gives an ICIR of 2.57 and reports annualized long-short return of 9.81%, annualized volatility of 4.43%, information ratio of 2.21, and maximum drawdown of 6.62%. These are historical test statistics, not evidence of future returns. The available text does not explain factor construction, portfolio formation, sample period, transaction costs, or robustness checks, and explicitly warns that changing market conditions could weaken the model.

Key ideas

• The research links turnover with volatility in the following trading day.
• A stronger turnover-volatility relationship is interpreted as a possible sign of informed trading and information leakage.
• A composite factor based on price-volume interaction is reported to have historical long-short performance statistics.
• The summary omits implementation and robustness details, and historical results may not persist.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.