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RETURNS, TRADING VOLUME AND VOLATILITY IN THE STOCK MARKET OF MAURITIUS

B. M. Nowbutsing

University of Mauritius, Republic of Mauritius

S. Naregadu

Ernst and Young, Republic of Mauritius.

ABSTRACT

This paper examines the trading volume and return and volatility relationship on the Stock Exchange of Mauritius (SEM). Thirty-six stocks, six constructed indices and the SEMDEX has been used to test the validity of the Mixture of Distributions Hypothesis where volume is taken as a proxy for the rate of informal arrival. To achieve our objectives several versions of the Autoregressive Conditional Heteroscedasticity (hereafter ARCH) family is adopted namely the simple ARCH model, GARCH and GJR-TGARCH. Analysis has also been done to include a risk component in the models by using ARCH-in-mean models. Further, two conditional mean equations, the random walk and the AR (1) have been employed. Very weak evidence of a positive relationship between trading volume and volatility has been found, therefore support of the Mixture-of-Distributions hypothesis and the Sequential Information Arrival hypothesis cannot be found on the SEM.

Key Words: Volatility, ARCH, GARCH, GJR-TGARCH

JEL: G14, G15