The Empirical Investigation of Relationship between Return, Volume and Volatility Dynamics in Indian Stock Market

Abstract

This paper examines the empirical relationship between return, volume and volatility dynamics of stock market by using daily data of the Sensitive Index (SENSEX) during the period from October 1996 to March 2006. The empirical analysis provides evidence of positive and significant correlation between volume and return volatility that is indicative of the both mixture of distribution and sequential arrival hypothesis of information flow. Causality from volatility to volume can be seen as some evidence that new information arrival might follow a sequential rather than a simultaneous process. In addition, GARCH (1,1) documents the small declines in persistence of variance over time if one includes trading volume as a proxy for information arrivals in the equation of conditional volatility and ARCH and GARCH effects remain significant, which highlights the inefficiency in the market. This finding supports the proposition that volume provides information on the precision and dispersion of information signals, rather than serving as a proxy for the information signal itself.

Keywords

• contemporaneous relationship
• causal relationship
• linear Granger causality
• GARCH (1
• 1)
• EGARCH