New evidence on the relation between return volatility and trading volume

Thomas C. Chiang, Zhuo Qiao, Wing Keung WONG

    Research output: Contribution to journalJournal articlepeer-review

    45 Citations (Scopus)

    Abstract

    In the empirical literature, it has been shown that there exists both linear and non-linear bi-directional causality between trading volumes and return volatility (measured by the square of daily return). We re-examine this claim by using realized volatility as an estimator of the unobserved volatility, adopting a stationary de-trended trading volume, and applying a more recent data sample with robustness tests over time. Our linear Granger causality test shows that there is no causal linear relation running from volume to volatility, but there exists an ambiguous causality for the reverse direction. In contrast, we find strong bi-directional non-linear Granger causality between these two variables.On the basis of the non-linear forecasting modeling technique, this study provides strong evidence to support the sequential information hypothesis and demonstrates that it is useful to use lagged values of trading volume to predict return volatility.

    Original languageEnglish
    Pages (from-to)502-515
    Number of pages14
    JournalJournal of Forecasting
    Volume29
    Issue number5
    DOIs
    Publication statusPublished - Aug 2010

    Scopus Subject Areas

    • Modelling and Simulation
    • Computer Science Applications
    • Strategy and Management
    • Statistics, Probability and Uncertainty
    • Management Science and Operations Research

    User-Defined Keywords

    • High frequency data
    • Non-linear granger causality
    • Return volatility
    • Trading Volume

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