The Dynamic Relationship between Price and Trading Volume: Evidence from Indian Stock Market

Abstract

This study investigates the nature of relationship between price and trading volume for 50 Indian stocks. Firstly the contemporaneous and asymmetric relation between price and volume is examined. It examines the dynamic relation between returns and volume using VAR, Granger causality, variance decomposition (VD), and impulse response function (IRF). Mixture of Distributions Hypothesis (MDH), which tests the GARCH vs. volume effect, is also studied between conditional volatility and volume. The results show that there is positive and asymmetric relation between volume and price changes. Further results show that there is a bi-directional relation between volume and returns. However, the results of VD imply weak dynamic relation between returns and volume which becomes more evident from the plots of IRF. On MDH, the results are mixed, neither entirely rejecting MDH nor giving it an unconditional support.