Linear and nonlinear Granger causality tests are used to examine the dynamic relation between daily Dow Jones stock returns and percentage changes in New York Stock Exchange trading volume. We find evidence of significant bidirectional nonlinear causality between returns and volume. We also examine whether the nonlinear causality from volume to returns can be explained by volume serving as a proxy for information flow in the stochastic process generating stock return variance as suggested by Clark's (1973) latent common‐factor model. After controlling for volatility persistence in returns, we continue to find evidence of nonlinear causality from volume to returns.

Using data on 560 firm‐commitment initial public offerings of common stock for the 1982–1983 period, we find that the cross‐sectional distribution of one‐day returns is modeled better as a mixture of two distributions, with the parameter estimates of one distribution being consistent with underpricing and the other with price stabilization. Further, the evidence that early IPO returns are drawn from a mixture distribution persists for at least four weeks. The implications of these results for the analysis of IPO returns are illustrated by examining the influence of a measure of ex ante price uncertainty on IPO pricing.