RELATIONSHIP BETWEEN STOCK RETURN, TRADING VOLUME AND VOLATILITY: EVIDENCE FROM PAKISTANI STOCK MARKET
National University of Modern Languages, Pakistan
Attiya Y. Javid
Pakistan Institute of Development Economics, Pakistan
This study investigates the relationship between trading volume and returns and volatility of Pakistani market for the period of July 1998 to October 2008. The Dickey-Fuller test is applied to turn the time series stationary. The ARCH and GARCH-M models are used to test the return, volatility and volume relationship. The results indicate that there is evidence of first order autocorrelation in market return and individual stock returns. The results of Granger Causality test suggest that there is feedback relationship between the market return and volume. However, in case of individual stock returns the evidence indicates for more stocks’ return causing volume than volume causing returns. The empirical results verify that there is significant interaction between trading volume and return volatility when volume is entered into variance equation of GARCH-M model. The findings suggest that there is significance effect of the previous day trading volume on the current return and this implies that previous day returns and volume has explanatory power in explaining the current market returns. The presence of significant autoregressive process of first order in the GARCH-M model indicates a firm relationship of volume with the future path of returns.
Key words: Mixture of Distribution Hypothesis, Sequential Information Arrival Hypothesis, GARCH-M
Jel Classification: G10, G15