The Endogeneity of Trading Volume in Stock and Bond Returns: An Instrumental Variable Approach

42 Pages Posted: 3 Apr 2019

See all articles by Ehab Abdel-Tawab Yamani

Ehab Abdel-Tawab Yamani

Chicago State University

David A. Rakowski

University of Texas at Arlington

Date Written: May 2019

Abstract

This paper investigates the joint determination of trading volume and returns. Our approach follows from the argument that trading activity depends on security returns, thus resulting in a reverse causality from returns to trading activity. Using exogenous instruments for security trading activity, we estimate a system of two‐stage simultaneous equations to better model the return‐volume relationship. Our results confirm that returns and trading volume are determined simultaneously in both stock and corporate bond markets and that conclusions about the direction and significance of causality between volume and returns can be reversed once one corrects for the endogeneity of volume.

Keywords: endogeneity, simultaneity, trading volume, security returns, two‐stage least squares

JEL Classification: C18, C30, C36, G10, G12

Suggested Citation

Yamani, Ehab Abdel-Tawab and Rakowski, David A., The Endogeneity of Trading Volume in Stock and Bond Returns: An Instrumental Variable Approach (May 2019). Financial Review, Vol. 54, Issue 2, pp. 303-344, 2019. Available at SSRN: https://ssrn.com/abstract=3364528 or http://dx.doi.org/10.1111/fire.12182

Ehab Abdel-Tawab Yamani (Contact Author)

Chicago State University ( email )

College of Business
9501 S. King Drive / BHS 411
Chicago, IL 60628
United States
773-995-3954 (Phone)

David A. Rakowski

University of Texas at Arlington ( email )

Box 19449 UTA
Arlington, TX 76019
United States

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