gender differential paper IJCRB

ijcrb.webs.com
JUNE 2011
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 3, NO 2
1.1 Problem Statement
The study intends to investigate the empirical relationship between stock returns and trading
volume in Pakistan
1.2 Significance of study
This study will be of significant importance for investors, portfolio managers and analyst for
investment decision making and analysis purposes respectively in the Pakistani stock market.
1.3 Rational of Study
Returns on stock and trading volume are two prime indicators of trading activity on a stock
market. These factors jointly determined, by the same market dynamics and may contain
valuable information about a security. The rational of this research is to facilitate Investors to
understand that how stock returns and trading volume affects each other so that they can make
the investment decisions accordingly.
2. Literature Review
Stock market is an organized way for the people to buy and sell stocks and corporations to raise
funds. Its role is very important in the operations of the country`s economics system (Ajayi,
Richard & Mougue, 1996). Many past studies and researches have been done in different
countries about the relationship between stock returns and trading volumes.
Several theoretical models are proposed to explain this relation between two variables Osborne
(1959), Westerfield (1977), and Rogalski (1978). These include mixture of distribution model
for asymmetric information was proposed by Clark (1973), Epps and Epps (1976), Tauchen and
Pitts (1983) and Harris (1986). Karpoff (1986) forwarded a theory that relates returns and
volatility with volume traded, which resulted in a relationship between volume and price change.
However, Karpof (1987) repeated the study empirically and found a weak evidence to support
the relationship between volume and returns, and further suggested a model that relates trading
volume, returns and volatility.
Trading volume and stock returns are studied by the large number of researchers and there is
enough evidence to support their relationship like Ratner and Leal (2001) examined the Latin
American and Asian financial markets and found a positive relation between returns and
volumes in these countries except India. Similarly Lee and Rui (2002) used daily data of
Shanghai and Shenzeh markets and found a consistently strong relationship between returns and
volumes. As for the casual relation, they found little evidence of predictability of returns by
volumes or vice versa either within the Chinese domestic market or in combination with the two
overseas market considered. Hiemstra and Jones (1994) found a new result using VAR model.
They found a significant positive relation going in both directions between stock returns and
trading volumes. Basci et al. (1996), found strong evidence of relationship between the two
variables. Granger, Godfrey (1963) and Morgenstern (1964) used daily data to examine the
relation between returns and volumes and found the positive relationship between the two
variables. Stock prices and returns normally change if there is change in trading volume. As with
returns, trading volume mainly reflect the available set of relevant information to the market. It
is evident form the past research that investor`s expectations always lead to an increase in
trading volume, which therefore reflect the sum of investor`s reactions to news Mediros &
Doornik, (2002). Harris (1987) brings the favorable results for NYSE stocks and Medeiros
and Doornik (2002) significant relationship among the variables in Brazilian stock market.
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