Examining the relationship between stock return volatility and trading volume: new evidence from an emerging economy

Abstract

Using daily stock return data for individual stocks from an emerging economy, this article examines the relationship between return volatility and trading volume under the theoretical postulate of the mixture of distributions hypothesis. The results suggest that the contemporaneous trading volume as a proxy for latent information arrival to the market did not contribute to the removal of significant ARCH or Generalized Autoregressive Conditional Heteroscedasticity effects that are found in stocks at the first stage of the investigation. The same holds for the lagged volume except for one case. This, perhaps, suggests that the trading volume (contemporaneous or lagged) is not adequately conveying information to induce traders’ views of the desirability of trade and, therefore, points to the need for searching for other micro and macro variables to be used as potential proxy for information arrival to the stock market of the emerging economy.

Keywords:

• stock return volatility
• emerging economy
• ARCH and GARCH effects
• mixture of distributions hypothesis
• trading volume

JEL Classification:

• C22
• C52
• O16

Acknowledgements

The authors thank Mr. Rafiqul Alam, former Secretary, Government of Bangladesh, for facilitating access to the data used in the study and an anonymous referee for helpful suggestions.

Notes

¹ Basher et al. (2007) and Hassan and Chowdhury (2008) provide detailed accounts of the DSE and the Bangladesh capital market. Information on DSE can also be obtained from the DSE website at http://www.dsebd.org/.

² No trading on the DSE takes place on Friday since it is the weekly holiday in Bangladesh.

³ Marginally significant case (i.e., Stock 7) is omitted from further analysis of volatility-volume relationship.