The Relation between Price Changes and Trading Volume: A Study in Indian Stock Market

ABSTRACTThis study investigates the dynamic relationship between stock return and trading volume of Indian stock Market by using Bivariate Regression model, VECM Model, VAR, IRF and Johansen’s Co integration test. The study shows that there is a bi-directional causality between trading volume and stock return volatility. Again the study used Variance Decomposition technique to compare the degree of explanatory power of the trading volume over stock return and the evidence supports the influential role of the trading volume in the Indian stock market. Further Johansen’s co integration analysis demonstrates that stock return is co integrated with the trading volume indicating long-run equilibrium relationship. The study concludes that stock price changes in any direction have information content for upcoming trading activities.