Heterogeneity of Trading Information and the Price-Volume Relationship: Theory and Evidence

Abstract

The purpose of this paper is to propose a new theory regarding the heterogeneity of trading information and price-volume relationship. Basically, the heterogeneity of trading information influences the market demand and supply curves of a stock (or equity index), which in turn affects the price-volume relationship for that stock (or index). This theoretical framework helps resolve existing issues regarding price-volume relationships for equities. For example, empirical experience demonstrates that stock price reversals from tops or rebounds from bottoms are often accompanied with extremely large trading volume; however, an abnormal large volume is not always, but more likely, to lead a price reversal (or rebound). This is due to the greatest extent of heterogeneity of trading information among traders at the time of price reversals (or rebounds). Empirically, this investigation focuses on the price-volume relationship surrounding stock price reversals (or rebounds), which clarify the role of information. The results strongly support the proposed framework.

Price-Volume Granger Causality Tests in the Egyptian Stock Exchange (EGX)

“…For instance, Li et al (2016) find, using nonlinear Granger tests, a bidirectional causality between stock price changes and trading volume in China. Hsu et al (2016) examine the price-volume relationship around stock price reversals and rebounds in Taiwan and find asymmetric effects on the price-volume relationship around price increases as well as price decreases. As well, the findings of Gupta et al (2018) indicate that lagged stock returns Granger cause trading volume in the long run in both China and India, while the findings of Sampath and Garg (2018) do not only indicate strong evidence of a positive association between stock returns and trading volume in India but also indicate a lead-lag relation with strong evidence of Granger causality from stock returns to trading volume.…”