Stock trading volume

Abstract

The literature on asset market and market microstructure has devoted surprisingly little attention newlineto trading volume. Many economic models of financial markets and market microstructure have newlinebeen developed to explain the predictability of prices (returns), and information content of it. newlineHowever, far less attention has been devoted to explain the behavior of trading volume. To fill newlinethis gap in the literature, this study tries to expand our understanding of trading volume for an newlineemerging market by empirically estimating econometric models using recently available daily newlinevolume data for individual securities listed on the Bombay Stock Exchange (BSE) and the National newlineStock Exchange (NSE). The analysis carried out serves several purposes : a) understand newlinethe motives for trade and the process by which trades are realized, b) the interaction between newlineprice and volume, and c) the roles that risk preferences and market frictions play in determining newlinestock trading activity. Our empirical contributions include : (1) the construction of a volume newlinebased index for the Indian equity markets and comprehensive exploratory data analysis of the newlinetime-series behavior of trading volume; (2) modeling trading volume series using long-memory newlinemodels and its forecasting performance; (3) estimation of dynamic price and volume relations using newlineMarkov Switching framework; and (4) a new approach for empirically identifying various newlinefactors determining the stock trading volume. The empirical result that stock trading volume newlineis a long-memory process, does not affect market efficiency. The MS-VECM model with two newlineregimes provides a good characterization of the asymmetry in price-volume dynamics for the newlineIndian stock markets with the high volatility regime associated with important local (social, newlineeconomic, and political) and international events affecting the Indian Stock markets. The results newlinealso demonstrate that many of the chosen stock-specific characteristics explain a significant portion newlineof the variation in Indian stock trading volume and suggest that