THE EMPIRICAL RELATIONSHIP BETWEEN STOCKS RETURNS, TRADING VOLUME AND VOLATILITY: EVIDENCE FROM STOCK

Abstract

The purpose of this paper is to inspect the pragmatic association among daily traded volume of stocks, volatility as well as daily stock returns by taking one market index that is FTSE 100 and five individual stocks trading on FTSE 100. FTSE 100 index is under study because it represents about 81% of the market capitalization of the whole London Stock Exchange. The five stocks which are under examination are traded on FTSE 100 belongs to different sectors. The stocks are selected randomly by keeping in mind the fact that one from each sector. The stocks are Royal bank of Scotland (RBS), Vodafone (VOD), Sainsbury (SBRY), British Petroleum (BP) and British American Tobacco (BATS) and their sectors are Banks, Mobile telecommunication, Food and Drug Retailers, Oil and Gas Producers and Tobacco respectively. The data was taken for the period ranging from 7, July 2010 to 7, July 2014. Only one measure of trading volume is used that obtained by taking log of the daily turnover. This study does not use the de-trended trading as done in previous studies. Stationarity tests, OLS estimation, ARCH, GARCH and VAR model was employed in order to investigate undermine relationship. By considering individual stocks both positive and negative contemporary link found between the traded volume of stocks as well as their returns. But indication of negative contemporary link between daily traded volume and returns in case of market index. Evidence have been found that past return causes volume but no evidence that past volume causes returns so this suggests, no feedback association among returns and traded volume by considering market as well as stocks. ARCH effect cannot be reduced by introducing traded volume as an advisory variable in GARCH model so this suggest that traders trading in FTSE 100 cannot find traded volume as an informative variable. This study has also evaluates the linkage among volatility and traded volume separately and also the association among volatility, stock returns and traded volume.

Keywords—Stock returns, Trading Volume, Stock Volatility, FTSE.