Volume and R2: a first look

Roll (1988) reports that when days on which public announcements occur are excluded from a regression of stock returns on market returns, the R²s are largely unaffected. To explain his findings, Roll suggests that much of the firm‐specific movements in common stocks may be a result of private information or occasional trading frenzy. As a test of Roll's conjecture, volume is used in this study as a proxy to capture the impact of firm‐specific information and irrational trading. If Roll's conjecture is correct, the R² should rise when high‐volume days are excluded from a regression of stock returns on market returns. The results presented here are consistent with that prediction, but they are not strong.