Causality relationship between trading volume and stock returns:

Evidence from Nepalese Stock Market

Shiva Ram Shrestha1
shivaram.shrestha@gmail.com
Abstract
This paper aims to empirically examine the causal relation between trading volume and stock returns for
Nepalese Stock Market using Granger causality procedure, using monthly data for the period of July 2007 to
February 2015. The study analyzed for the investigation of the Granger causality between trading volume and
stock price using monthly data sets to ascertain if the causality runs from volume to stock price or from stock price
to volume or in both directions. The study of Granger causality test fail to provide any directional Granger
causality running from stock returns to trading volume nor trading volume to stock returns at first order difference
level. This study shows that neither trading volume nor stock returns have the power to predict the other and
therefore contradicting the sequential arrival hypothesis and noise trade model. Finally, the findings support the
weak form efficient market hypothesis in Nepalese stock market.
Key Words: Trading volume, Stock Returns, Granger Causality Test, Nepalese stock market

1. INTRODUCTION
Returns and volume are two important elements of every kind of economic equilibrium and these elements are
jointly determined by the same market dynamics and may contain valuable information about securities.
Therefore, it is generally believed that these two variables should have very close and straightforward
relationship. Volume analysis is an important tool in the archery of technical analysts. It tries to forecast future
price move on the basis of past volume. Two famous stock market adages say: It takes volume to make prices
move, and Volume is heavy in bull market and light in bear market. These adages imply two different kinds of
causalities between these two variables. However, conceptual and empirical findings on the relationship between
these two variables are not so straightforward. Causaliy is a kind of statistical feedback concept which is widely
used in the building of forecasting models. Causality tests can provide useful information on whether knowledge
of past stock returns improves short run forecasts of current and future trading volume.There are several evidence
for the presence of a causal relation between stock returns and trading volume in the literatures. First, Epps
(1975) gave evidence based on the asymmetric reaction of two groups of investors-bulls and bears-to the positive
information and negative information. Secondly, Clark (1973) developed mixture of distribution model and
provided evidence that the speed of information flow is a latent common factor which influence stock returns and
trading volume simultaneously. Third evidence is the sequential arrival of information model of Copeland (1976)
which indicated a positive relationship between price changes and trading volume.

1 Ph.D. Scholar (2014, July) Tribhuvan University, Faculty of Management

Account Officer, Council for Technical Education & Vocational Training (CTEVT), Sanothimi, Bhaktapur

This objective of this study is to empirically examine the causal relation between volume and share price for
Nepalese Stock Market using Garnger causality procedure. The study investigate the Granger causality between
stock returns and trading volumes to ascertain if the causality runs from volume to stock returns or from stock
returns to volume or in both directions. The study uses monthly time series data sets. The rest of the paper is
organized as follows: the next section discusses the conceptual relationship between volume and price and
presents a brief survey of empirical research on this issue. The third section highlights the methodology of the
present study. This is followed by discussions on the results of the study in the fourth section. Section 5 concludes
the paper.
2.

REVIEW OF LITERATURE

Granger (1969) developed a methodology to examine whether changes in one series cause changes in another. If
the current value of Y can be predicted by using the past values of X and considering other relevant information
including the past values of Y, it may be concluded that X causes Y. To determine the presence of and the
direction of a causal relation between return and volume, the Granger causality method has been chosen.
Granger causality method was utilized by several researchers to investigate the causal relation between share
price and trading volume. Some examples of such studies are as follows. Most of studies found bidirectional
causality between trading volume and stock returns volatility. Some of the studies found unidirectional causality
from volume to volatility and some from volatility to volume.
Author
Jain & Joh (1988)

Assets
S&P 500 stock index

Period
1/1979-12/1983

Hiemstra & Jones (1994)

DIJA index

1915-1940;1941-

Causality
unidirectional; Returns

Volume
1990

Returns

Returns

unidirectional; Returns

Bidirectional;
Volume

Gwilym,

McMillan

and

LIFFE future contract

1/1995-6/1995

Chen, Firth and Rui (2001)

Nine developed national Market

1973-2000

Ciner (2002)

Tokyo Commodity Exchange

1/1992-9/2000

Luu and Martens (2003)

S&P 500 Index

1/1990-6/1999

Speight (1999)

Bidirectional;
Volume

Volume
Bidirectional;

Volume
INTRA: Bidirectional;

Volume

RETURNS:
Returns
Sarwar (2003)

Currency options on the British

Pound

1-1993-10/1995

Bidirectional;
Volume

Returns

Returns

SQUARED
unidirectional;

Volume
Returns

Author
Darrat, Rahman and Zhong

Assets
DJIA Stocks

Period
4/1998-6/1998

Chen (2007)

Live cattle, pork bellies,

German mark and Swiss
franc futures

1/1995-12/1995

Hatrick et al. (2011)

HSBC stock

01/2009-05/2009

Hussain (2011)

DAX 30 Index

5/2004-9/2005

(2003)

Causality
Bidirectional;

Returns

Returns

Returns

Volume

Volume
Bidirectional;
Volume
Bidirectional;
Volume
unidirectional;
Returns

but

investigate

do

NOT

returns

Return

Return

Volume
Attari,

Rafiq

and

Awan

Karachi Stock Exchange

2000-2012

Darwish (2012)

Palestine Stock Exchange

10/2000-8/2010

Halova (2012)

NYMEX (oil and gas futures)

1/8/2008-

(2012)

Bidirectional;
Volume
Bidirectional;
Volume
Absolute

return:

Bidirectional;

Volume

24/9/2010
returns
Conditional

variance:

unidirectional; Returns

Abdullahi,

Kouhy

and

1/2008-5/2011

Muhammad (2014)

West Texas Intermediates

and Brent crude oil futures

Samman

Muscat securities market

1/2009-12/2013

Volume
Neither trading

volume

nor

returns have the power to predict

the other

and

Al-Jafari

(2015)

unidirectional; Volume

Return

In nutshell, on the basis of above-mentioned studies it can be stated that the significant efforts have been made at
the international level to evaluate stock return and trading volume, whereas in Nepal, the causal relationship
between stock price index and market capitalizations with macro economic variables has been investigated by
G.C.and Neupane (2006) using the time series data for the year 1988 to 2005. The study found the empirical
evidence that the direction of causality from real GDP to stock price index but no reverse causation from stock
price index to real GDP. The study also concluded bidirectional causality between market capitalizations. The
causal relationship between stock returns and trading volume has not been investigated in Nepalese stock
market. Therefore, the current study is an attempt to fill this gap and sheds light on the informational efficiency of

Nepalese stock market. This paper examines the causal relationship between stock returns and trading volume
context in Nepalese stock market and contributes to the literature in several respects. It deploys theGranger
causality test to investigate information flow between the variables instead of ARIMA. Moreover, the time period
considered in the study helps to evaluate the impact of new regime changes in economic situation of Nepal. Thus,
the study will enhance the understanding of market asymmetry, market efficiency and information processing in
Nepalese stock market.
3.

DATA AND METHODOLOGY

This section describes the following aspects of research methodology to test the relationship between stock
returns and trading volume in Nepalese stock market: (i) nature and sources of data, (ii) selection of enterprises,
(iii) the variables, (iv) methods of analysis, and (v) the limitations of the study.
3.1 NATURE AND SOURCES OF DATA
The relationship between trading volume and stock returns are examined by using secondary sources of
trading volume and return data series. Most of the data related stock returns and trading volume were
collected from annual report and official reports of Security Exchange Board of Nepal (SEBON), official
website of Nepalese Stock Exchange (NEPSE). The data set used in this study comprises monthly closing
prices and trading volume in NEPSE. The study period covers the time period of eight years, ranging from
July 2007 to February 2015 and thereby making 92 months. The monthly data set are collected from
http://www.nepalstock.com/ which is available from July 2007 onward. Both series, (monthly trading volume
and monthly closing prices), are expressed in the local currency. The monthly stock returns are computed
using monthly closing prices.
3.2 SELECTION OF ENTERPRISES
The study consists of all listed companies of Nepalese stock market at index level. The study also considers
sector wise data of Nepalese stock market.
3.3 VARIABLES SPECIFICATION
The study mainly considers monthly volume series and return series to examine the relationship between
trading volume and stock returns.
Trading volume: The total number of shares traded were used to measure of trading volume for study of
aggregate trading activities e.g., Epps and Epps, (1976), Gallant, Rossi, and Tauchen, (1992), Hiemstra and
Jones (1994) and Ying (1966). Other studies used the total number of shares traded divided by the total
number of shares outstanding as a measure of trading volume, e.g., Campbell, Grossman, Wang (1993),
and LeBaron (1992). Individual share volume was often used in the analysis of price/volume and
volatility/volume relations, e.g., Andersen (1996), Epps and Epps (1976), and Lamoureux and Lastrapes
(1990, 1994). Alternatively, even the total number of trades were used by Conrad, Hameed, and Niden,
(1994). James and Edmister, (1983) used the number of trading days per year as measures of trading
activity.
The NEPSE provides three measures of trading volume: 1) the volume traded (the sum of the number of
share traded during the period); 2) the number of trades (the sum of trade during the period); 3) the total
value traded expressed in NPR (the sum of the price of share traded times the number of share traded). This

study uses the total value traded of the shares as the measure of trading volume because it takes into
account of the relative market value of shares while other measures mentioned above do not. The level
volume series is non-stationary, thus the study use first order difference volume series. The volume series at
the time t noted as

D ( V t ) is expressed as:

V
D( t)=First order differences (Volumet )

Where

Volumet is the NPR value of the shares traded at time t, and D (.) is the first order difference

operator.
Stock returns: The study considered monthly price index change as stock returns. A monthly price index
change is calculated using the natural log of the ratio of a stocks price index (P) from the current month (t) to
the previous month (t-1) as:

Rt =monthly stock returns=ln

Where,

Pt

Pt
Pt 1

( )

represents the closing price index for the period t; t is the time in months.

Pt1 is the

closing price index for the period of t-1; Ln (.) is the natural logarithm operator. All returns are expressed
in local currencies and are not adjusted for dividends. The study also utilize the first order difference of
stock returns to maintain same order.
D(

Rt = First order differences (Monthly stock returns)

3.4 METHODS OF ANALYSIS

As stated earlier, the objective of the paper is to determine existence of and the direction of causality
between returns and volume on the NEPSE as per the conventions of the Granger Causality
methodology(Granger, 1969). To measure causality between the stock returns and trading volume, the
Granger Causality Model is used. This test is used to determine whether or not returns is the cause of
trading volume, vice versa, or neither. The Granger Causality test provides four possible outcomes to a
regression of stock returns and trading volume: No causality, stock returns causes trading volume only,
trading volume causes stock returns only, and bi-directional causality. The Granger Causality Test estimates
the results of two regressions:

t =1

t =1

Rt =R + j . Rt 1+ j . V t 1 + t

(1)

t=1

t=1

V t = V + j . V t1 + j . R t1 + t

Where,,

(2)

Rt = monthly stock returns of NEPSE index.

V t = monthly trading volume of NEPSE index.

Equation (1) regress the dependent variable,

Rt , to how it related to lagged variables of

Vt

Equation (2) is similar to Equation (1), it regress

assume that the disturbance terms,

state no evidence of causation from

to lagged variables of

Rt V t .

Rt V t . Both equations

t , are uncorrelated. The null hypothesis for equation (1) and (2)
Rt V t and no causation from V t Rt respectively.

Unit root Test

Unit root test has a crucial importance in the time series analysis as the choice of the techniques and
procedures for further analysis and modeling of series depends on their order of integration. Without taking
into account the presence of unit root in the variables, the analysis may produce spurious results. For this
purpose, the study uses the well-known Dickey-Fuller or the Augmented Dickey-Fuller (ADF) test (Dickey
and Fuller, 1981) and Phillips- Perron (PP) unit roots are employed. Two variants of this model are
estimated: (i) including only a constant term () as the deterministic regressor and (ii) including both constant
() and time trend (t) terms as deterministic regressors. ADF unit root test is sensitive towards the lag length
included in the regression equation. So, the lag lengths have been chosen based on Akaike Information
Criterion (AIC). The respective models estimated took the following form:

y t = 0+ y t 1+ i y t i + t
i =1

y t = 0+ y t 1+ 1 t + i y ti + t (4)
i=1

(3)

Where, y is the stock returns or trading volume.

Johansen's Co-integration Test
After confirming the non-stationary of time series in their levels, the next step is the investigation of presence
of co-integration between trading volume and stock returns.

For this purpose, the study employed

Johansen's multivariate maximum likelihood method using this co-integrated process to test those variables
have existed long-run equilibrium relationship (Johansen 1988). Co-integration test is to identify existence of
any co-integrating relationship between trading volume and stock returns in Nepalese stock market.

Johansen's approach has used

to distinguish the number of co-integrated vector. It could use two

likelihood ratio tests to process co-integration.

a. Likelihood ratio or Trace Test:

H 0 : Rank ( ) < r (at most r integrated vector)

H 1 : Rank ( )> r (at least r+1 integrated vector)

n

trace =T

i=r +1

T is sample size,

ln ( 1 i )
i

(5)

is estimate of characteristic root. If test rejects

H 0 that means variables exist

at least r+1 (i.e. long-term co-integrated relationship).

b. Maximum Eigenvalue Test:
The maximum eigenvalue of statistic (

max ) tests the null hypothesis of co-integrating vectors

against the alternative of r+1 co-integrating vectors.

H 0 : Rank ( ) r (at most r integrated vector)

H 1 : Rank ( )> r (at least r+1 integrated vector)

max (r ,r + 1)=T (1 r+ 1)
If test accept

(6)

H 0 that means variables have r co-integrated vector.

3.5 LIMITATIONS OF STUDY

There are a large number of non-listed companies contributing to the dynamics of Nepalese economy; these
are not included in the study due to data problems. The study used monthly data ranging from July 2007 to
February 2015 comprising 92 months period. Perhaps a longer period of data could have yielded a more
refined result. The results relating to causal relationship between stock returns and trading volume in this
study based on Granger causality test using available monthly stock returns and trading volume data series.
4. ESTIMATION AND RESULTS
The purpose of this section is to provide the empirical results of Granger causality between stock returns and
trading volume in Nepalese stock market. The analysis consist of: (i) descriptive statistics of variables, (ii)
Unit root test, (iii) Johansen's co-integration test and (iv) Results of Granger causality between stock returns
and trading volume.
4.1 DESCRIPTIVE STATISTICS

The study started investigation with same basic descriptive statistics of time series of stock returns and
trading volume from monthly data of NEPSE index for the period of 2007.07 to 2015.02. It would provide
insight to the average size and deviation from mean value of the variable. The descriptive statistics for the
variables are shown in annex 1. The analysis shows that the mean value of monthly stock returns over the
period is -0.0039 with standard deviation of 0.3313.The maximum and minimum returns observed are 1.3438
and 1.4224 respectively. Applying Jarque-Bera test for normality, Significant Jarque-Bera statistics clearly
rejects the hypothesis, which implies that pattern of monthly trading volume and monthly stock stock returns
series does not conform to normal distribution, which is the precondition for any market to be efficient in the
weak form (Fama (1965), Stevenson and Bear (1970), Reddy (1997), Kamath (2008) and Mahajan and
Singh (2008). Further, skewness and excess kurtosis preserve the evidence of the nature of departure from
normality because the skewness and kurtosis value of stock returns are -0.3949 and 13.8980 respectively.
The skewness coefficient in excess of unity is generally taken to be fairly extreme. Kurtosis generally either
much higher or lower indicates extreme leptokurtic or extreme platykurtic (Parkinson, 1980). Thus, monthly
stock returns and trading volume series are not normally distributed.
Similarly, the descriptive statistics of sector wise data set shows that the highest mean value of return series
is 2.316% with standard deviation of 7.723% was found in hotel sector among the sectors. The highest mean
value of trading volume is NPR 1654.896 with standard deviation of 3069.45 in commercial bank sector. The
monthly stock returns and trading volume series are not normally distributed in all sectors except return
series of commercial bank and other sector. It implies that pattern of almost all variables does not conform to
normal distribution.
4.2 UNIT ROOT TEST
The time series variables - stock returns and trading volume - should be stationary for the analysis of time
series statistics. The unit root test helps to test whether the times series variables are stationary or not.
The unit root test results are shown in annex 2. The statistics are inferior to the McKinnon critical value at
10% level. This indicates that the null hypothesis of unit root is rejected for the level form of stock returns and
first order difference of stock returns series. But, volume variable have unit root in level form and no unit root
in first order difference of trading volume series in ADF test.
The PP test also rejected the null hypothesis of unit root for stock return, first order differnces and first order
differenced trading volume variable as of ADF test. Philips-Perron test have also shown that level form of
volume variable have unit root in level forms. Hence, the study comes to conclusion that the times series
variables- trading volume and stock returns- of the study should be changed with first order difference to get
these variables are stationary. Having determined the non-stationary of time series in their levels, and they
are also of some order of integration I (1), co-integration test has been applied to ascertain whether trading
volume and stock returns are co-integrated or not.
4.3 JOHANSEN'S CO-INTEGRATION TEST
Johansen's co-integration is an econometric property of time series variables. If two or more series are
themselves non stationary, but a linear combination of time is stationary, then the series are said to be cointegrated. A vector of time series variable is co-integrated if each element of order one, I (1), but there exists

a nonzero vector (called co-integrating vector) such that is integrated of order zero, I (0). Economic theory
often suggests that certain subset of variable should be linked by a long-run equilibrium relationship. The
Johansen's co-integration tests statistics are shown in annex 3. The result of the Johansen's co-integration
tests shows that the null hypothesis of no co-integration between trading volume and stock returns is
rejected since both Trace and Max-Eigen statistics are larger than the critical values at 1 percent significance
level. In other words, for co-integrating regression, trading volume = f (stock returns), one can reject the null
hypothesis r = 0 against the alternative hypothesis r = 1 since both Trace and Max-Eigen statistics are larger
than the critical values at 1 percent significance level but cannot reject the null r1 against the alternative r = 2
since both Trace and Max-Eigen statistics are less than the critical values even at 1 percent level. The fact
that the presence of co-integration between trading volume and stock returns suggest (i) that there is a longrun equilibrium relationship between the two time series, and (ii) the existence of causality in at least one
direction.

4.4 GRANGER CAUSALITY TEST

The procedure used in this study for testing statistical causality relationship between stock returns and trading
volume is the 'Granger-causality' test, developed by C.W.J. Granger in 1969. The aim of this test is to
determine the predictive content of one variable beyond that inherent in the explanatory variable itself. The
Granger causality test requires the variables in the test to be stationary. According to the Granger
representation theorem, if two variables say, X t and Yt are co integrated and each is individually I(1), that is,
integrated of order 1, then either Xt must Granger-cause Yt or Yt must Granger-cause Xt.
The results of Granger causality tests between first order difference of trading volume and first order difference
of stock returns are shown in annex 4. The analyses indicate that the null hypothesis that first order difference
of stock returns do not Granger causes first order difference of trading volume could not be rejected for market
data series from 2007.07 to 2015.02. The F-statistic test could not shows the test is significant at 10% level.
Therefore, there is a neither Granger causality running from stock returns to trading volume nor Granger
causality running from trading volume to stock returns at first order difference. This means that neither volume
nor stock returns contain predictive power for the stock returns and directional change in stock returns. The
results of the Granger causality test in the sector wise firms also shows similar findings. The commercial bank,
development bank and Manufacturing & processing sector shows uni-directional Granger causality from stock
returns to trading volume. Remaining sectors could not establish any directional causality between stock
returns and trading volume.
5. SUMMARY & IMPLICATIONS
The study has examined the granger causality relationship between trading volume and stock returns for
Nepalese stock market. In particular, the study used ADF and PP unit root tests to determine the time series
properties of both trading volume and stock returns. For causality test, the study applied the Granger causality
test models.
The results from the various unit root tests indicate that stock returns are stationary at level form and first order
difference but trading volume are not stationary at level form and stationary at first order differnce. The study
use first order differenced trading volume and stock returns for further analysis. The result from the standard
Granger causality test fail to provide any directional Granger causality running from stock returns to trading
volume or trading volume to stock returns at first order difference level. This study shows that neither trading
volume nor stock returns have the power to predict the other and therefore contradicting the sequential arrival
hypothesis and noise trade model. Finally, the findings support the weak form efficient market hypothesis in
Nepalese stock market.

The findings of the study is supported to the study of Abdullahi, Kouhy and

Muhammad (2014) in West Texas Intermediate(WTI) and Brent Crude Oil futures Markets. The study results is
contradictory with the study of Heimstra and Jones(1994) in Dow Jones stock returns and New York stock
exchange, Ciner (2002) in Tokyo commodity futures market and Mahajan and Singh (2009) in Indian stock
market and Meshkin, Gargaz and Abbasi (2014) in Tehran stock exchange that is indicative of noise trading
model of return-volume interaction in this market. The results presented in this study helps to increase our
understanding regarding the relationship between trading volume and stock returns, particularly for the

NEPSE. These findings also help to explain the behaviour of returns and a better understanding of market
movement. It also indicated that any study of trading volume and returns is necessarily relating to information
flow and possibly to identify a better proxy for information flow. From investment perspective, the relationship
between stock returns and trading volume is of great importance to individuals who invest and

trace a

perspective as trading volume reflects information about market expectations and its relationship with price,
having important implications on trading, speculation, forecasting and finally on hedging activities.
These results are useful for regulators, market participants, and the efficiency of the share market sector. The
results are useful for regulators when they consider such measures as limits on price movements and
positions. For market participants, the results are useful since they imply that volume can be used to predict
prices, lending support to technical analysis. Finally, the results imply market inefficiency that may be due to
the fact that traders may condition their prices on previous volumes.
The findings have a number of important implications for future research in this area. First, the results
contribute to the empirical literature on Nepalese stock market by highlighting detectable Granger linear
causalities. In addition, the findings of significant unidirectional Granger causality from trading volume to stock
returns illustrate the importance of these predictor variables in the forecasting of stock prices.

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Meshkin, S., Gargaz, M., & Abbasi, E. (2014). Investigation of the Relationship between Trading Volume, Volatility
and Stock Return in Tehran Stock Exchange. Journal of Applied Science and Agriculture, 9(9), 145-153.
Parkinson, M. (1980). The extreme value method for estimating the variance of the rate of return. Journal of
Business, 53, 61-65.

Reddy, S. (1997). Efficiency of Indian Stock Markets: An Empirical Analysis of Weak-Form EMH of the BSE. UTI
Indian Capital Market Conference, 91-115.

Samman, H., & Al-Jafari, M. (2015). Trading Volume and Stock Returns Volatility: Evidence
from Industrial Firms of Oman. Asian Social Science, 11(24), 139-146.
Sarwar, G. (2003). The Interrelation of Price Volatiltiy and Trading of Currency Options. The
Journal of Futures Markets, 23, 681-700.
Stevenson, A., & Bear, M. (1970). Commodity Futures: Trends or Random Walks? The Journal of Finance, 25(1),
65-81.
Ying, C. (1966). Stock market prices and volumes of sales. Econometrica, 34, 676-685.

ANNEX 1

Descriptive statistic of variables

The data for this table are collected and compiled from the listed at Nepal Stock Exchange Limited for the period
2064.01 to 2071.11(July 2007 to February 2015) with 92 months .The table contained monthly stock returns and trading
volume at index level. The monthly trading volume is calculated by multiplying number of shares traded times closing

Vt

share price. The monthly trading volume has been used for volume (

). The monthly stock returns are calculated

by natural log of current closing stock index divided by lagged closing stock index, i.e. monthly stock returns

( t )=ln

Pt
Pt1

( )

. In the table, N represents number of observations and mean, median, maximum and minimum

for average, maximum and minimum returns respectively for the period. SD stands for standard deviation of the returns.
SK is a measure of skewness and KURT represents kurtosis. The Jarque-Bera (JB) test of normality is the test of the
joint hypothesis that SK and KURT are 0 and 3, respectively. In that case, the value of the JB statistic is expected to be
zero. JB is defined as JB=

S 2 ( k 3 )
n
+
6
24

any p-value less than 0.05 indicate that the distribution is not normal.

Panel I
Va
r

Std.
Dev.

Mean

Med

Max

Min

Rt

0.003
88

0.017
10

1.3438
0

1.4223
0

0.331
29

Skewne
ss
0.3947
3

Vt

2407.
46

1511.
62

15211.
61

386.11

2602.
15

2.41

Kurtosi
s

JarqueBera

Pvalu
e

13.899
73

457.804
60

0.00
0

9.98736

9.72

262.57

0.00
0

616000000
.00

Sum Sq.
Dev.

Panel II
Sect
or

CB

DB

FIN

HTL

va
r

Mean

Med

Max

Min
0.2155
0

Rt

0.000
84

0.0047
5

0.303
20

Vt

1502.
88

7883.
12

Rt

0.004
69

1023.5
1
0.0090
5

Vt

279.8
9

Rt

0.001
51

136.36
0.0087
5

Vt

171.5
9

90.12

2163.
41

Rt

0.022
66

0.0050
0

0.387
00

15.16
0.0758
0

31.75

3.19

393.3
1

0.00

Vt

0.462
90
1654.
97
0.211
40

117.55
0.4070
0
33.35
0.1628
0

Std.
Dev.

Skewn
ess

Kurtos
is

JarqueBera

Sum Sq.
Dev.

0.099
02

0.3269
9

3.7136
4

3.59175

0.89232

1532.
27

2.07

7.20

133.64***

214000000
.00

0.110
21

0.8215
8

7.7245
4

95.91467***

1.10525

334.0
6

2.21

7.96

169.06***

10155431.
00

0.063
93

0.6944
5

4.8961
5

21.17695***

0.37191

264.6
0

5.11

36.69

4750.57***

6371041.0
0

0.064
38

2.5326
5

13.241
77

500.44550*
**

0.37720

69.05

3.08

13.28

551.14***

433914.80

INS

MFG

OTR

Rt

0.020
95

0.0069
5

0.260
40

Vt

240.8
9

35.00

2441.
45

Rt

0.015
46

0.0011
5

0.338
60

29.75
Rt 0.000
20

1.91

788.4
6

0.0000
0

0.206
50

39.25

24.02

377.3
3

0.002
57

0.0000
0

2.80

1.36

Vt

Vt
Rt

TRD

Vt

0.1677
0

0.080
87

0.9496
5

4.1203
5

18.63975***

0.59519

446.6
8

2.66

10.73

337.23***

18156668.
00

0.063
18

0.5802
1

16.990
71

755.49840*
**

0.36330

118.6
2

5.42

32.55

3798.95***

1280413.0
0

0.061
66

0.2935
4

4.2568
9

7.37706**

0.34602

55.43

3.68

19.91

1303.69***

279549.40

0.439
70

0.00
0.1636
0

0.065
60

3.1466
1

23.606
75

1779.59700
***

0.39159

23.43

0.00

4.28

2.96

13.35

545.32***

1668.12

2.75
0.3083
0
0.00
0.1526
0

Annex 2

Summary result of Unit root test

This table reports the results of the ADF test and PP test for unit roots. The lag length (p) is chosen based on AIC. The empirical model;
m

Yt Yt 1 j Yt i t t
where

autoregressive process. A constant

Yt

i 1

is the first difference of the time series variable and

and the coefficient on a time trend

0
different possibilities of the unit root process. If

is the lag order of the

are also incorporated in the model to account for the

and
, it corresponds to a random walk model and if only
modeling a random walk with drift.

Panel I

Rt

Unit Root Test

ADF @ level form
15.1602**
Constant
*
Constant &
15.1341**
Trend
*
15.2418**
none
*
ADF @ first difference
10.5772**
Constant
*
Constant &
10.5172**
Trend
*
10.6396**
none
*
PP @level
15.4928**
Constant
*
Constant &
16.1118**
Trend
*
none
15.578***
PP @first difference
36.9981**
Constant
*
Constant &
36.7741**
Trend
*
37.2365**
none
*

Vt

-2.5804
-3.179*
-1.7389*

-9.8094***
-9.7386***
-9.8621***

-2.2881
-2.9563
-1.4936
11.2398**
*
11.3053**
*
11.1678**
*

Panel II

Commercial Bank
Unit Root Test

Rt

Vt

Development Bank

Rt

Vt

Finance Company

Rt

Vt

, it equals to

ADF TEST@ level form

Constant
8.6263***
Constant & Trend
8.7738***
none
8.6739***
ADF TEST@ first difference

4.6996***
5.1579***
3.1674***

6.2629***
6.2766***
6.2896***

Constant

7.7089***

8.1264***

8.8303***

Constant & Trend

7.6558***

8.0752***

8.6407***

-7.759***

8.1734***

8.9488***

4.5576***
4.8755***
3.0505***

none
PP TEST@ level

8.6254***
Constant & Trend
8.7638***
none
8.6731***
PP TEST@ first difference
37.0699**
Constant
*
37.4395**
Constant & Trend
*
37.3937**
none
*
Constant

31.237***
30.5326**
*
30.002***

3.6657***
4.1588***

3.6031***
5.6771***

-2.5307**

-3.624***

-5.0653***

10.6678**
*
10.6176**
*
10.7118**
*

15.4786**
*
15.4022**
*
15.5662**
*

12.9489**
*
12.8771**
*
13.0221**
*

6.2921***
6.2815***
6.3174***

3.5894***

5.6451***
5.6382***
5.6783***

26.6065**
*

15.5525**
*
16.4699**
*

35.002***
26.8346**
*

-4.136***
-2.1523**

14.812***

22.9744**
*
23.5244**
*
23.1031**
*

-6.4312***
-6.5553***

-6.4331***
-6.5555***
-4.9824***

-31.388***
-31.056***
31.7826**
*

Insurance Company
Unit Root Test
ADF TEST@ level form

Rt

Constant

3.6621***

Constant & Trend

7.9641***

none
3.4655***
ADF TEST@ first difference
Constant

9.3808***

Constant & Trend

9.3278***

none
PP TEST@ level

9.4359***

Vt

Rt

Vt

-1.3837

3.8738***

-2.2635

5.1758***

4.6324***

-0.946

4.4864***

3.4386***

11.6588**
*
11.7476**
*
10.9099**
*

16.1597**
*
16.0904**
*
16.2139**
*

10.9229**
*
10.8607**
*
10.9855**
*

12.1567**
*
12.0853**
*
12.2223**
*

10.6822**
*
10.6183**
*
10.7433**
*

3.8268***

Constant

-7.549***

-2.1398

Constant & Trend

8.0167***

-3.5458**

-8.799***

4.6701***

-1.8109*

-8.134***

3.2923***

15.9528**
*
15.8888**
*
16.0002**
*

39.686***
39.2256**
*
40.0848**
*

17.6865**
*
17.6672**
*
17.4442**
*

Other Company
Unit Root Test

Rt

ADF TEST@ level form

10.7434**
Constant
*
10.8085**
Constant & Trend
*
10.8035**
none
*
ADF TEST@ first difference

Rt

4.9837***

8.6268***

none
7.2569***
PP TEST@ first difference
66.9211**
Constant
*
66.2177**
Constant & Trend
*
69.1326**
none
*

Manufacturing
Company

Hotel Company

Vt

Trading Company

Rt

Vt

7.1922***

9.5878***

-5.9633***

7.4388***

9.6112***

-6.0807***

5.3555***

9.6311***

-4.6978***

13.4855**
*
16.1223**
*
11.0163**
*
60.4837**
*
59.9818**
*
62.683***

Vt

-2.5726
-2.546
-2.184**

-11.409***
-11.349***
11.4781**
*

-9.7495***
-9.6956***
-9.2515***
50.9596**
*
51.4925**
*
51.3447**
*

Constant
Constant & Trend
none
PP TEST@ level

12.7127**
*
12.6393**
*
12.7862**
*

10.6988**
Constant
*
10.7943**
Constant & Trend
*
10.7564**
none
*
PP TEST@ first difference
56.3257**
Constant
*
55.9354**
Constant & Trend
*
56.6658**
none
*
Notes: (*) Significant at the 10%;

13.8526**
*
13.7788**
*
13.9307**
*

10.3476**
*
10.2883**
*
10.4095**
*

7.1972***

9.7506***

-5.9468***

-7.35***

9.9165***

-6.0119***

5.2766***

9.7965***

-4.6437***

47.1165** 41.7914**
*
*
53.1938** 42.9035**
*
*
46.0511** 42.2278**
*
*
(**) Significant at the 5%

-9.5518***
-9.5009***
-9.6086***

26.9329**
*
28.2698**
*
27.3456**
*
and (***) Significant at the 1%.

Annex 3 Summary result of Johansen's Co-integration test

This table reports the results of the Johansen's Co-integration test. There are two statistics to process co-integration. (A).Trace test; the
n

empirical model for trace test is

test rejects

H0

trace =T

i=r +1

ln ( 1 i )

where, T is sample size,

is estimate of characteristic root. If

that means variables exist at least r+1 long term co-integrated relationship. and (b). Maximum eigenvalue test; The

empirical model for maximum eigenvalue test is

max (r ,r + 1)=T (1 r+ 1)

. The Johansen's co-integration test statistic of the

sample firms for the period of 2064.4 to 2071.11(July 2007 to February 2015). P-values are in the parentheses
Panel I series first order difference of stock returns and trading volume due to non-stationary of vol at level form.

H
0
r=
0
r
1

H
1
r
1
r
2

Eigenval
ue
0.74727
2
0.37163
6

Trace
value
0.74727
2
0.37163
6

PValue
0.000
1
0.000
0

H
0
r=
0
r
1

H
1
r=
1
r=
2

Max-Eigen
statistic
122.4143
41.35255

PValue
0.000
1
0.000
0

Panel II Panel I series level form of stock returns and trading volume

Sector
CB

H
0
r=
0

H
1
r
1

Eigenval
ue
0.29085
2

Trace
value
50.4654
3
(0.0000)

H
0
r=
0

H
1
r=
1

Max-Eigen
statistic
30.93221
(0.0001)

Decisi
on
2 CEs

Decisi
on
2 CEs

DB

FIN

HTL

INS

MFG

OTR

TRD

r
1

r
2

0.19509
9

r=
0

r
1

0.25403
8

r
1

r
2

0.11055

r=
0

r
1

0.25083
5

r
1

r
2

0.12184
4

r=
0

r
1

0.24866
5

r
1

r
2

0.10725
4

r=
0

r
1

0.32138
9

r
1

r
2

0.02841
6

r=
0

r
1

0.46273
6

r
1

r
2

0.34837
2

r=
0

r
1

0.35619
4

r
1

r
2

0.26503
4

r=
0

r
1

0.43377
9

r
1

r
2

0.24903
7

19.5332
2
(0.0000)
36.9208
6
(0.0000)
10.5436
3
(0.0012)
37.6854
6
(0.0000)
11.6937
7
(0.0006)
35.9420
8
(0.0000)
10.2107
7
(0.0014)
37.4880
9
(0.0000)
2.59448
3
(0.1072)
94.4592
3
(0.0000)
38.5453
9
(0.0000)
67.3460
5
(0.0000)
27.7138
(0.0000)
76.9652
6
(0.0001)
25.7759
4
(0.0000)

r
1

r=
2

19.53322
(0.0000)

r=
0

r=
1

26.37722
(0.0004)

r
1

r=
2

10.54363
(0.0012)

r=
0

r=
1

25.99169
(0.0005)

r
1

r=
2

11.69377
(0.0006)

r=
0

r=
1

25.73131
(0.0005)

r
1

r=
2

10.21077
(0.0014)

r=
0

r=
1

34.8936
(0.0000)

r
1

r=
2

2.594483
(0.1072)

r=
0

r=
1

55.91383
(0.0000)

r
1

r=
2

38.54539
(0.0000)

r=
0

r=
1

39.63225
(0.0000)

r
1

r=
2

27.7138
(0.0000)

r=
0

r=
1

51.18933
(0.0001)

r
1

r=
2

25.77594
(0.0000)

2 CEs

2 CEs

2 CEs

1 CEs

2 CEs

2 CEs

2 CEs

Annex 4 Summary Statistics of Granger-causality test

Rt
The variable volume (Vt) is the log difference of trading volume in month t, Stock returns,
, is the monthly stock returns. F-statistics of the
Granger-causality test are shown for the period of 2064.4 to 2071.11(July 2007 to February 2015) P-values are in the parentheses
Panel I
F-Statistic
Null Hypothesis
(P-Value)
Note: *** 1% or less, ** up to 5%, *
Panel II

V
D( t)
Sector

D(

Rt

DB

does notNull
Granger
Cause D(
Hypothesis

Vt

CB

Rt

up to 10% level significant.

FStatistic
0.0366
(PValue)
(0.0.8487)
1.2006
does not Granger Cause
(0.2762)

Rt
does not Granger Cause

Rt

does not Granger Cause

Vt

Vt

does not Granger Cause

9.0686**
(0.0034)
0.0271
(0.8697)
0.3267
(0.5690)

RET

Rt

does not Granger Cause

Vt
Vt

does not Granger Cause

Rt
FIN

Rt

does not Granger Cause

Vt
Vt

does not Granger Cause

Rt
HTL

Rt

does not Granger Cause

Vt
Vt

does not Granger Cause

Rt
INS

Rt

does not Granger Cause

Vt
MFG

Vt

does not Granger Cause

3.6854*
(0.0581)
1.8481
(0.1775)
0.0198
(0.8884)
1.769
(0.2616)
1.5632
(0.2145)
0.9941
(0.3215)
0.0760
(0.7835)
0.3501
(0.5555)

Sector

Null Hypothesis

Rt

Rt
does not Granger Cause

Vt
Vt

does not Granger Cause

Rt
OTR

Rt

does not Granger Cause

Vt
Vt

does not Granger Cause

Rt
TRD

Rt
Vt

FStatistic
(PValue)

11.6627**
(0.0010)
0.4834
(0.4887)
0.9026
(0.3447)
0.08266
(0.7744)

does not Granger Cause

0.4919
(0.4849)