Causal Relationship among Trading Volume, Returns and Stock Volatility: Evidence from an Emerging Market

The aim of this study was to examine contemporaneous as well as causal relationship among trading volume, returns and volatility. The data at daily basis were collected from Standard Capital Securities (SCS) Trade ranging period 2008 to 2014. Six non financial sectors were selected as a sample of study. Trading volume was used as dependent variable where as stock return and volatility as independent variables. Generalized Autoregressive Heteroskedasticity (GARCH 1,1) model was used to check the normality of data. Multiple regression equation and granger causality models were applied to estimate the contemporaneous as well as causal relationship respectively. From contemporaneous perspective, all sectors results were founded significantly positive except Sugar. These results were confirming the Sequential-Arrival of Information-Hypothesis (SAIH) and Mixture of Distribution-Hypothesis (MDH). Finally by applying granger causality test, unidirectional causality was founded among three sectors namely cement, food and composite in both trading volume to return and trading volume to volatility. However bidirectional causality was founded between chemical and food sectors from return to volume and volatility to volume respectively. Investors were recommended to make the investment in all sectors except sugar.