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The Relationship between Stock Market Volatility and Trading Volume: Evidence from South Africa

Pramod Naik (), Rangan Gupta and Puja Padhi ()
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Puja Padhi: Department of Humanities and Social Sciences, Indian Institute of Technology, Bombay, India

No 201689, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper revisits the relationship between equity trading volume and returns volatility for the Johannesburg Stock Exchange (JSE) of South Africa using daily data over the period of 6th July 2006 to 31st August 2016. Further, we analyzed an after-crisis period, i.e., 1/04/2008 to 8/31/2016, in order to verify the findings immediately after the sub-prime crisis. EGARCH and Granger causality models were employed to analyse the volume-volatility relationship. Also the level of volatility persistence has been compared before and after the inclusion of trading volume in the volatility model as an exogenous variable. The analysis shows that the JSE exhibits volatility asymmetry implying that the return volatility responds more to the bad news than the good news. The relationship between trading volume and market volatility is found to be positive and contemporaneous supporting the mixture of distribution hypothesis. But lagged volume is found to be statistically insignificant in explaining volatility. We also uncover that the volatility persistence remains high even after the inclusion of trading volume as an explanatory variable in the volatility model. The above set of results also holds for the post-crisis sub-sample. Furthermore, the pairwise Granger causality tests indicate a feedback relationship between volume and volatility only in the case of the sub-sample. But for the full sample we find a unidirectional causality between volume and volatility, with trading volume Granger causes market volatility.

Keywords: Asymmetric volatility; Trading volume; EGARCH; South Africa; Volatility persistence (search for similar items in EconPapers)
JEL-codes: C58 G11 G12 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2016-12
New Economics Papers: this item is included in nep-afr and nep-fmk
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