Testing for granger causality in the stock price-volume relation: A perspective from the agent-based model of stock markets

From the perspective of the agent-based model of stock markets, this paper examines the possible explanations for the presence of the causal relation between stock returns and trading volume. In addition, since the excess demand for the stock is an observable variable in our model, the causal relation between stock returns and the excess demand for the stock is also examined. Using a new version of the Granger causality test, which does not require an ad-hoc procedure of filtering, we found that the bi-directional causality between trading stock returns and trading volume ubiquitously exists in all our four artificial stock markets of different designs. The implication of this result is that the presence of the stock price-volume causal relation does not require any explicit assumptions like information asymmetry, reaction asymmetry, noise traders, or tax motives. In fact, it suggests that the causal relation may be a generic property in a market modeled as evolving decentralized system of autonomous interacting agents.