The Dynamic Relationship between Price and Trading Volume: Evidence from Indian Stock Market
51 Pages Posted: 25 Dec 2009
Date Written: December 23, 2009
This study investigates the nature of relationship between price and trading volume for 50 Indian stocks. Firstly the contemporaneous and asymmetric relation between price and volume are examined. Then we examine the dynamic relation between returns and volume using VAR, Granger causality, variance decomposition (VD) and impulse response function (IRF). Mixture of Distributions Hypothesis (MDH), which tests the GARCH vs. Volume effect, is also studied between the conditional volatility and volume. The results show that there is positive and asymmetric relation between volume and price changes. Further the results of VAR and Granger causality show that there is a bi-directional relation between volume and returns. However, the results of VD imply weak dynamic relation between returns and volume which becomes more evident from the plots of IRF. On MDH, our results are mixed, neither entirely rejecting the MDH nor giving it an unconditional support.
Keywords: Trading volume, Volatility, Mixture of distributions hypothesis, GARCH, Granger Causality, VAR, Impulse response function, Variance decomposition
JEL Classification: C22, C32, G12
Suggested Citation: Suggested Citation