Trading Volume, Volatility and Return Dynamics: Individual and Cross-Market Analysis

36 Pages Posted: 24 Nov 2007

See all articles by Leon Zolotoy

Leon Zolotoy

CentER, Tilburg University

Bertrand Melenberg

Tilburg University - Center for Economic Research (CentER)

Date Written: November 23, 2007

Abstract

In this paper we study the dynamic relationship between trading volume, volatility, and stock returns at the international stock markets. First, we examine the role of volume and volatility in the individual stock market dynamics using a sample of ten major developed stock markets. Next, we extend our analysis to a multiple market framework, based on a large sample of cross-listed firms. Our analysis is based on both semi-nonparametric (Flexible Fourier Form) and parametric techniques. Our major findings are as follows. First, we find no evidence of the trading volume affecting the serial correlation of stock market returns, as predicted by Campbell et.al (1993) and Wang (1994). Second, the stock market volatility has a negative and statistically significant impact on the serial correlation of the stock market returns, consistent with the positive feedback trading model of Sentana and Wadhwani (1992). Third, the lagged trading volume is positively related to the stock market volatility, supporting the information flow theory. Fourth, we find the trading volume to have both an economically and statistically significant impact on the price discovery process and the co-movement between the international stock markets. Overall, these findings suggest the importance of the trading volume as an information variable.

Keywords: trading volume, volatility, return reversal, price discovery

JEL Classification: G12, G14

Suggested Citation

Zolotoy, Leon and Melenberg, Bertrand, Trading Volume, Volatility and Return Dynamics: Individual and Cross-Market Analysis (November 23, 2007). Available at SSRN: https://ssrn.com/abstract=1032193 or http://dx.doi.org/10.2139/ssrn.1032193

Leon Zolotoy (Contact Author)

CentER, Tilburg University ( email )

Postbus 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Bertrand Melenberg

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2730 (Phone)