Decomposing returns into market and stock speci?c components is commonpractice and forms the basis of popular asset pricing models. But what aboutvolume ? Can volume be decomposed in the same way as returns ? Lo andWang (2000), in a recent paper, suggest such a decomposition. Our paperis in this line of work and, despite the similarity of the statistical approach,our contribution is twofold. First, we provide a theoretical model to explainthe decomposition of volume. Our model is the ?rst, to our knowledge,to justify the strategies of new generation of traders, that we call liquidityarbitrageurs. Second, we propose a new e¢ cient screening tool that allowspractitioners to extract speci?c information from volume time series. Weprovide an empirical illustration of the relevance and the possible uses ofour approach on daily data from the FTSE index from 2000 to 2002.
