Research On The Relationship Between Volume And Return

The purpose of this paper is to answer three questions. The first question is about the linear relationship between the daily volume of trading and the daily stock return. The second question is about that relationship’s stability. The last question is whether the daily volume of trading is suitable to be used as a proxy of the daily amount of information arrivals.When facing the first one, this paper model a EGARCH(1,1) model to research the linear relationship between the daily volume of trading and the daily stock return. Using EGARCH(1,1) model is to eliminate the impact of heteroskedasticity. To further study this kind of relationship, this paper studies the relationship between the volume and the rate of return per se and that between the volume and the absolute rate of return.When facing the second one, the total sample is divided into three sub-samples based on different market conditions. Then, this paper uses the above-mentioned model to study price-volume relationship in these different market conditions respectively. Finally, by comparing the conclusions in these different market conditions with the precious conclusions, we can studies the stability of the relationship between volume and the rate of return.When facing the third question, this article evaluates the suitability from two aspects. The first aspect is whether the volume is helpful to eliminate the leverage effect. The second aspect is whether the volume is helpful to eliminate the ARCH effect. This paper use EGARCH(1,1) to model the relationship between daily transactions volume and conditional variance of returns. The reason using EGARCH(1,1) model is that it captures the leverage effect and the ARCH effect.This paper is organized as follows. Section Ⅰ provides the introduction of theoretical models related and researches related. Section Ⅱ consists of two chapters studying three questions of this article. Conclusions are contained in Section Ⅲ.As to the first question, this paper concludes that it is the unexpected part of the volume that has significantly positive correlation with the rate of return per se and the absolute rate of return, and the linear relationship between the expected part of the volume and the rate of return is very weak. As to the second question, this paper concludes that the linear relationship between the expected part of the volume and the rate of return per se and that between the unexpected part of the volume and the absolute rate of return are stable, but the linear relationship between the unexpected part of the volume and the rate of return per se and that between the expected part of the volume and the absolute rate of return are unstable. As to the third question, this paper concludes that daily volume is not a suitable proxy for the amount of information arrivals, because it is unable to eliminate the ARCH effect.