Information, Trading Volume, and International Stock Return Comovements:
Evidence from Cross-listed Stocks

This paper investigates the dynamic relation between returns and trading volume in international stock markets. We test the heterogeneous-agent, rational expectations model of Llorente, Michaely, Saar, and Wang (2002) for a comprehensive sample of 556 foreign stocks cross-listed on U.S. markets from 36 different markets. Their model argues that investors trade to speculate on their private information or to rebalance their portfolios and predicts that returns associated with portfolio rebalancing tend to reverse themselves while returns generated by speculative trades tend to continue themselves. We test this prediction by analyzing the relationship between trading volume and return comovements between the home and U.S. markets for the cross-listed shares. We hypothesize that returns in the home (U.S.) market on high-volume days are more likely to continue to spill over into the U.S. (home) market for those stocks subject to the risk of greater informed trading. Our empirical evidence provides support for this hypothesis, which highlights the link between information, trading volume and international stock return comovements that has eluded previous empirical investigations.