Empirical Relationship Between Trading Volumes & Stock
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
Introduction
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
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
Introduction
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
References: European Journal of Economics, Finance and Administrative Sciences - Issue 24 (2010) Basu, P European Journal of Economics, Finance and Administrative Sciences - Issue 24 (2010) Foster, F.D., and S European Journal of Economics, Finance and Administrative Sciences - Issue 24 (2010) Sabri, Nidal Rashid (2008b) "High volatility and stock market crises in developed economies", Manuscript under publication