Trading Volume and Price Variability: Evidence on Lead-Lag Relations from Granger-Causality Tests

Posted: 5 Jul 1998

See all articles by Sanjai Bhagat

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Sanjiv Bhatia

Association for Investment Management and Research

Date Written: January 1996

Abstract

We test for Granger-causality between trading volume and price volatility. We modify the standard regression procedure in several ways. We take the first difference of the logarithmic transformation of each series to account for potential nonstationarity in the data. We isolate the time series structure of each series and test for causality using pre-whitened residuals to eliminate problems associated with autocorrelation in the data. Finally we test for causality in both mean and variance to account for the presence of time varying variance (ARCH) in both series. Our results provide strong evidence that price changes lead (cause) volume in the Granger-causality sense. There is no evidence that volume causes volatility.

JEL Classification: C22, C24, G13

Suggested Citation

Bhagat, Sanjai and Bhatia, Sanjiv, Trading Volume and Price Variability: Evidence on Lead-Lag Relations from Granger-Causality Tests (January 1996). Available at SSRN: https://ssrn.com/abstract=7308

Sanjai Bhagat (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Sanjiv Bhatia

Association for Investment Management and Research ( email )

915 East High Street
Charlottesville, VA 22902
United States

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