Trading Volume and Stock Returns: Evidence from Pakistan's Stock Market

Abstract

This paper investigates empirical contemporaneous and causal relationships between stock returns, trading volume and volatility of stock index in Pakistan’s stock market. The data relates to Karachi Stock Exchange (KSE-100 Index) and cover the period from Jan 2001 to May 2007. Granger Causality tests were employed to test whether trading volume precedes stock returns, or vice versa. GARCH (1,1) model was employed to test whether the positive contemporaneous relationship between trading volume and stock returns still exists after controlling for non-normality of error distribution. The study finds positive contemporaneous relationship between trading volume and return preserves after taking heteroskedasticity in to account. Moreover, VAR finds a feedback relationship between stock returns and trading volume, i.e., returns cause volume and volume causes returns which is consistent with the theoretical models that imply information content of volume affects future stock returns.

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