The Empirical Relationship between Stock Returns, Return Volatility and Trading Volume in the Brazilian Stock Market

14 Pages Posted: 22 Apr 2006

See all articles by Otavio Ribeiro de Medeiros

Otavio Ribeiro de Medeiros

University of Brasilia

Bernardus Ferdinandus Nazar Van Doornik

Government of the Federative Republic of Brazil - Central Bank of Brazil

Date Written: April 17, 2006

Abstract

We investigate the empirical relationship between stock returns, return volatility and trading volume using data from the Brazilian stock market (Bovespa). Our sample contains stock return and trading volume data from a theoretical portfolio including stocks participating in the Bovespa Index (Ibovespa) extending from 01/03/2000 through 12/29/2005. The empirical methods used include cross-correlation analysis, unit-root tests, bivariate simultaneous equations regression analysis, GARCH modeling, VAR modeling, and Granger causality tests. We find support for a contemporaneous as well as dynamic relationship between stock returns and trading volume, implying that forecasts of one of these variables can be only slightly improved by knowledge of the other. On the other hand, our results indicate that there is a contemporaneous and dynamic relationship between return volatility and trading volume. Additionally, by applying Granger's test for causality, we find that return volatility contains information about upcoming trading volume and vice versa.

Keywords: Stock returns, Return Volatility, Trading Volume, GARCH, Granger causality

JEL Classification: G10, G12, G14, G15

Suggested Citation

de Medeiros, Otavio Ribeiro and Doornik, Bernardus Ferdinandus Nazar Van, The Empirical Relationship between Stock Returns, Return Volatility and Trading Volume in the Brazilian Stock Market (April 17, 2006). Available at SSRN: https://ssrn.com/abstract=897340 or http://dx.doi.org/10.2139/ssrn.897340

Otavio Ribeiro De Medeiros (Contact Author)

University of Brasilia ( email )

Campus Universitario Darcy Ribeiro
Gleba A - Reitoria
Brasilia, DF 70910-900
Brazil

HOME PAGE: http://geocities.yahoo.com.br/otaviomedeiros/index.html

Bernardus Ferdinandus Nazar Van Doornik

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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