An Empirical Analysis of Stock Price-Volume Relationship in Indian Stock Market

Sarika Mahajan and Balwinder Singh

Vision, 2008, vol. 12, issue 3, 1-13

Abstract: This paper examines the empirical relationship (contemporaneous and causal) between volume and return, and volume and volatility in the light of competing hypothesis about market structure by using daily data of Sensitive Index of the Bombay Stock Exchange. Consistent with mixture of distribution hypothesis, positive contemporaneous relationship between volume and volatility is observed. Causality test further support the sequentially arrival of information hypothesis, which implies that new information is not simultaneously available to all traders and it takes time to absorb, which hampers the price discovery efficiency of the market. In addition, GARCH (1,1) documents small decline in the persistence of variance (volatility clustering) over the time if one includes trading volume as a proxy for information arrivals in the equation of conditional volatility but GARCH effects remain significant, which highlights the inefficiency in the market. Thus, volume provides information on the precision and dispersion of information signals rather than serving as a proxy for the information signal itself.

Keywords: Contemporaneous Relationship; Causal Relationship; GARCH (1,1) Model; Linear Granger Causality; VAR Modeling; JEL Classification: C32; G14 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:vision:v:12:y:2008:i:3:p:1-13

DOI: 10.1177/097226290801200301

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