International Journal of Humanities and Social Science

ISSN 2220-8488 (Print), 2221-0989 (Online) 10.30845/ijhss

Trade Volume and Returns in Emerging Stock Markets An Empirical Study: The Egyptian Market
Dr. N. M. HABIB

Abstract
The Paper investigates the joint dynamics of stock returns and trading volume in a small emerging financial market, i.e., the Egyptian Securities Exchange (ESE). The researcher is interested in the power of stock trading volume in predicting future return volatility and autocorrelations. The main theme of the study is twofold: First; testing the contemporaneous relationship between volume and volatility, using OLS and GARCH models. Second; investigating the dynamic (causal) relationship between trading volume and stock returns, to determine whether information about trading volume is useful in improving forecasts of price changes (returns) and return volatility. There are two related types of theories that explain the volatility-volume relationship: information theories and dispersion of beliefs theories. The main idea of the paper contradicts the efficient market hypothesis (EMH), which implies that the volume should not have any predictive power. The study is divided into five sections. Section one is an introduction that relates the study to the existing literature. The second section deals with the theoretical framework of the role of trading volume and its relationships with volatility. The third section is a review of the different approaches to the existing empirical work and a short summary of the empirical evidence. As to the fourth section, it presents the methodology used in the study: regression analysis using, first the ordinary least square (OLS) method, second using GARCH model to take care of any problems related to autocorrelation or heteroscedastisity. This section also introduces the relevant model used to test for causality relationship between volume and return, which is Granger causality. The last section contains the regression results and the conclusion. The study documents empirical tests on the relationships between stock return and trading volume in a small emerging stock market (The Egyptian Stock Exchange) during the period 1998-2005. Its findings establish several regularities about the role of trading volume in predicting the volatility of return and return itself. The main conclusion is that the lagged stock trading volume has a little role to play in forecasting the future return volatility. The second finding relates to the predictability of returns. The analysis suggests that there is no relation between volume and first autocorrelation of stock return. Third, the Granger causality tests indicate a bidirectional causal relation between volume and volatility. Specifically, any change in return volatility leads to a change in trading volume and vice versa. However no such inference can be made about the causal relation between return and volume.

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