The relationship between trading volume and exchange rate volatility: linear or nonlinear?

Abstract

Purpose The purpose of this paper is to examine the linear and nonlinear relations between returns volatility and trading volume for the Indian currency futures market. Design/methodology/approach To examine the contemporaneous relation between returns volatility and volume, the author uses the generalized method of moment estimator. For the linear causal relation, the author makes use of Granger (1969) bivariate vector autoregression model. The author tests for nonlinear Granger causality between returns volatility and trading volume based on a modified version of the Baek and Brock (1992) nonparametric technique developed by Hiemstra and Jones (1994). Findings The results indicate a negative contemporaneous relation between returns volatility and trading volume; therefore, the mixture of distribution hypothesis is not supported. The results of both linear and nonlinear Granger causality between futures returns volatility and trading volume indicate a significant bidirectional relation between the two variables lending support to the sequential arrival of information hypothesis. The results are robust to divergence of opinions as proxied by open interest. Practical implications The findings of this paper are important for the participants in the market and regulators. The participants in the market require alternatives to diversify their risk. The significant causal relation between returns volatility and trading volume implies that trading volume helps predict the futures prices and should lead to creation of more reliable hedging strategies for investment purposes. Furthermore, it may interest the regulators who need to decide upon the appropriateness of their policies in the currency futures market. Originality/value To the best of the author’s knowledge, there is no study that investigates the forecast ability of trading volume to futures returns volatility in an emerging currency futures market. Given that currency futures market is one of the largest markets in the world, and Indian rupee has seen wide fluctuations in the recent years, it seems exciting to explore the price–volume relation in the Indian currency futures market.

Pengaruh Dividen Announcement, Capital Gain dan Kurs Terhadap Trading Volume Activity (Studi Kasus pada Saham Syariah yang Terdaftar di JII Tahun 2015-2018)

“…Berdasarkan hasil pengujian diketahui bahwa kurs berpengaruh positif signifikan terhadap trading volume activity. Hasil tersebut sejalan dengan hasil penelitian Subiyanto (2015) dan Sudibyo (2016), namun tidak sejalan dengan Kumar (2019) yang menyatakan bahwa hubungan antara trading volume dan nilai tukar signifikan dan negatif. Apabila kurs rupiah menguat, maka investor akan tertarik untuk berinvestasi.…”