Revisiting the empirical linkages between stock returns and trading volume

Chen, Shiu-Sheng (2012): Revisiting the empirical linkages between stock returns and trading volume.

Abstract

This paper investigates whether the empirical linkages between stock returns and trading volume differ over the fluctuations of stock markets, i.e., whether the return–volume relation is asymmetric in bull and bear stock markets. Using monthly data for the S&P 500 price index and trading volume from 1973M2 to 2008M10, strong evidence of asymmetry in contemporaneous correlation is found. As for a dynamic (causal) relation, it is found that the stock return is capable of predicting trading volume in both bear and bull markets. However, the evidence for trade volume predicting returns is weaker.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock returns; Trading volume; Stock market fluctuations
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Arshanapalli, B., Doukas, J., 1993. International stock market linkages: Evidence from the pre and post-october 1987 period. Journal of Banking and Finance 17, 193–208.

Blume, L., Easley, D., O’Hara, M., 1994. Market statistics and technical analysis: The role of volume. Journal of Finance 49, 153–181.

Campbell, J. Y., Grossman, S. J.,Wang, J., 1993. Trading volume and serial correlation in stock returns. Quarterly Journal of Economics 108, 905–939.

Candelon, B., Piplack, J., Straetmans, S., 2008. On measuring synchronization of bulls and bears: The case of East Asia. Journal of Banking and Finance 32, 1022–1035.

Chuang, C.-C., Kuan, C.-M., Lin, H.-Y., July 2009. Causality in quantiles and dynamic stock return-volume relations. Journal of Banking and Finance 33, 1351–1360.

Eleanor Xu, X., Chen, P., Wu, C., May 2006. Time and dynamic volume-volatility relation. Journal of Banking and Finance 30, 1535–1558.

Elliott, G., Rothenberg, T. J., Stock, J. H., 1996. Efficient tests for an autoregressive unit root. Econometrica 64, 813–36.

Engle, R., 1982. Autoregressive conditional heteroskedasticity with estimates of the variance of U.K. inflation. Econometrica 50, 987–1008.

Frauendorfer, K., Jacoby, U., Schwendener, A., 2007. Regime switching based portfolio selection for pension funds. Journal of Banking and Finance 31, 2265–2280.

Garcia, R., 1998. Asymptotic null distribution of the likelihood ratio test in Markov switching models. International Economic Review 39, 763–788.

Granger, C. W. J., Morgenstern, O., 1963. Spectral analysis of New York stock market prices. Kyklos 16, 1–27.

Griffin, J. M., Nardari, F., Stulz, R. M., 2007. Do investors trade more when stocks have performed well? Evidence from 46 countries. Review of Financial Studies 20, 905–951.

Hamilton, J. D., 1989. A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica 57, 357–384.

Hamilton, J. D., Lin, G., 1996. Stockmarket volatility and the business cycle. Journal of Applied Econometrics 11, 573–593.

Hiemstra, C., Jones, J. D., 1994. Testing for linear and nonlinear Granger causality in the stock price-volume relation. Journal of Finance 49, 1639–1664.

Hong, H., Scheinkman, J., Xiong, W., 2006. Asset float and speculative bubbles. Journal of Finance 61, 1073–1117.

Hutson, E., Kearney, C., Lynch,M., 2008. Volume and skewness in international equitymarkets. Journal of Banking and Finance 32, 1255–1268.

Karpoff, J.M., 1987. The relation between price changes and trading volume: A survey. Journal of Financial and Quantitative Analysis 22, 109–126.

Lee, B.-S., Rui, O. M., 2002. The dynamic relationship between stock returns and trading volume: Domestic and cross-country evidence. Journal of Banking and Finance 26, 51–78.

Maheu, J. M.,McCurdy, T. H., 2000. Identifying bull and bear markets in stock returns. Journal of Business and Economic Statistics 18, 100–112.

McMillan, D. G., 2007. Non-linear forecasting of stock returns: Does volume help? International Journal of Forecasting 23, 115–126.

Ning, C.,Wirjanto, T. S., 2009. Extreme return-volume dependence in east-asian stock markets: A copula approach. Finance Research Letters 6, 202–209.

Perez-Quiros, G., Timmermann, A., 2000. Firm size and cyclical variations in stock returns. Journal of Finance 55, 1229–1262.

Psaradakis, Z., Spagnolo, N., 2003. On the determination of the number of regimes in Markovswitching autoregressive models. Journal of Time Series Analysis 24, 237–252.

Saatcioglu, K., Starks, L. T., 1998. The stock price-volume relationship in emerging stock markets: The case of Latin America. International Journal of Forecasting 14, 215–225.

Statman, M., Thorley, S., Vorkink, K., 2006. Investor overconfidence and trading volume. Review of Financial Studies 19, 1531–1565.