Empirical Relationship Between Trading Volumes & Stock

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European Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 24 (2010) © EuroJournals, Inc. 2010 http://www.eurojournals.com

The Empirical Relationship between Trading Volumes & Stock Return Volatility in Indian Stock Market Naliniprava Tripathy Associate Professor (Finance), Indian Institute of Management Shillong Meghalaya, India, PIN 793 014 E-mail: nalini_prava@yahoo.co.in/ nt@iimshillong.in Tel: +91-364-2308037, Fax: +91-364-2230041 Abstract This study investigates the empirical relationship between trading volume and stock returns volatility in Indian stock Market during the period from January 2005 to January 2010 by using ARCH, GARCH, EGARCH, TARCH, PGARCH and Component ARCH models. The analysis shows that the recent news of trading volume can be used to improve the prediction of stock price volatility. This study also finds the evidence of leverage and asymmetric effect of trading volume in stock market and indicates that bad news generate more impact on the volatility of the stock price in the market. Further the study concludes that asymmetric GARCH models provide better fit than the symmetric GARCH model.

Keywords: Trading volume,, Stock price, GARCH , EGARCH, TARCH, PARCH, Component ARCH JEL Classification Codes: G-12, G-14, G-17

Pricing of securities depends on volatility of each asset. Therefore, price changes indicate the average reaction of investors to news. The arrival of new information makes investors to adapt their expectations and this is the main cause for price and return changes. Trading volume and volatility are indicators of the current stock market activity on one hand and a potential source of information for the future behavior of stock market on the other hand. Numerous papers have documented the fact that high stock market volume is associated with volatile returns. Various studies reported that there are significant relationships between volume and stock price movement and volatility. For example, Saatccioglu and Starks (1998) found that volume led stock prices changes in four out of the six emerging markets. Chan et al. (2000) found that trading volume for foreign stocks is strongly associated with NYSE opening price volatility. Griffin, et al. (2007) investigated the dynamic relation between market-wide trading activity and returns in 46 markets and reported strong positive relationship between turnover and past returns. The analysis of the relationship between stock prices and volumes traded has been conducted from various perspectives. More recently, the use of conditional volatility to investigate the relationship between stock returns and trading volume became very popular. Although conditional volatility have always been used, realized volatility, which is also called historical volatility is the sum of squared intraday returns over a certain interval such as a day, has recently attracted the attention of financial economists and econometricians as an accurate measure of the true volatility. In the last three decades, a large number of countries had initiated reform process to open up their economies. Emerging markets have received huge inflows of capital in the recent past and


European Journal of Economics, Finance and Administrative Sciences - Issue 24 (2010)

became viable alternative for investors seeking international diversification. Among the emerging markets, India has received it’s more than fair share of foreign investment inflows since its reform process began. One reason could be that India was not affected by the Asian crisis and has maintained its high economic growth during that period (Basu and Gupta 2005). Today India is one of the fastest growing emerging economies in the world. The reform process in India officially started in 1991. As a result, demand for investment funds is growing significantly and capital market growth is expected to play an increasingly important role in the process. At this...
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