The Empirical Relationship between Stock Returns, Return Volatility and Trading Volume in the Brazilian Stock Market
14 Pages Posted: 22 Apr 2006
Date Written: April 17, 2006
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: Suggested Citation