Causal effect of volume on stock returns and conditional volatility in developed and emerging market

Abstract

This study examines the dynamic causal (linear as well as non-linear) relationship between trading volume and return and between volatility and returns. We have used the vector autoregression based Granger causality framework to examine the linear causality, while the non-linear causality have been investigated using bivariate noisy Macke-Glass model which has been used so far in only economic and commodity data sets. The results of linear and non-linear causality show that trading volume Granger does not cause returns and volatility and suggests that there is unidirectional causality from returns to volume and from volatility to volume. The results strongly support the noise trader model, partially support the sequential information model hypothesis, and contradict the efficient market hypothesis. The evidence that volume does not influence stock returns and volatility can be incorporated by market participants in their trading strategies.