The Volume-Returns Relationship

in the Indian Stock Market

Mahender Yadav*, Shalini Aggarwal** and Simmi Khurana***

The present paper examines the causal relationship between trading volume and stock market returns
using daily data of the S&P CNX NIFTY and Sensitivity index (SENSEX) for the period from
April 1, 2002 to March 31, 2012. Using descriptive statistics, correlation analysis, unit root tests
and Granger causality test, the study shows that in SENSEX, the causality runs both ways, while
in the case of S&P CNX NIFTY, causality runs one way. On the basis of the above findings, the
participants in the stock markets, i.e., brokers, investors, regulators, policy makers, portfolio
managers and academicians, can frame strategies to deal with market volatility.

Introduction
Capital market plays a very significant role in the development of any nation. In India, more
volatility has been observed as compared to many developed markets of the world such as
USA, Japan and Singapore. Volatility oscillates the volume of trade in the market which
directly impacts the stock price and ultimately affects the stock returns. Further, it affects the
financial behavior of the investors in taking investment decision. The investor decides to
invest through volatility in the market, i.e., buying or selling the particular stock. Investors
should understand the causal relationship between the trading volume and stock returns
which may help him to frame different market strategies for gaining returns and avoiding
losses. Generally, low volume in the market means the market is illiquid and as a result the
fluctuation in the price of stock is less as compared to high volume of trade in the market. All
these factors which affect the volume of trade in the market and their prices have been
discussed profoundly in the area of different streams of management such as Finance,
Economics and Accounting. The major area that affects the volume and returns of particularly
stock is stock information. In SENSEX and NIFTY in India, increase in volume generally has
a relation of information for particular stock or may be other factors such as FIIs, exchange
rate, gold price and influence of other indices such as Nikkie, Dow Jones and Nasdaq. Trading
*

Assistant Professor, Panipat Institute of Engineering & Technology, Panipat, Haryana, India.
E-mail: mahenderyadav46@gmail.com
* * Associate Professor, Institute of Management Studies, Ghaziabad, Uttar Pradesh, India; and is the corresponding
author. E-mail: shaliniaggar@gmail.com
*** Assistant Professor, Ajay Kumar Garg Institute of Management, Ghaziabad, Uttar Pradesh, India.
E-mail: khurana.simmiajay@gmail.com
2015
IUP. All Rights
Reserved. in the Indian Stock Market
The
Volume-Returns
Relationship

35

volumes can increase even if investors interpret the information identically but they have
different prior expectations. DLF stock price declined by more than 50% in one day on
account of information of more debt in the financial statements of the company. Therefore,
studying the causal relationship between stock returns and trading volume improves the
understanding of the microstructure of the stock market. The basic purpose of this relationship
study is to provide protection against movement in future in order to reduce the extent of
financial risks.
This paper studies the returns-volume causal relationship from different perspectives
like trading volume to stock returns, stock returns to trading volume, previous days volume
to current returns, and previous days returns to current volume in different stock markets.

Literature Review
Various works have been done that show the relationship between trading volume and stock
prices. Monthly, weekly, daily and hourly data on futures, indices and individual stock have
been studied to find the relationship. Osborne (1959) studied the relationship between
trading volume and stock prices from a different perspective. He used daily, hourly, monthly,
and weekly data on individual stock to study the price change and trading volume relation.
Karpoff (1987), Jain and Joh (1988), Richard et al. (1993), and Gunduz and Hatemi (2005)
studied the causal relationship between stock return volatility and trading volume and
reported the existence of strong relationship between stock return volatility and trading
volume.
The relationship between stock returns and volume has been interpreted in different
ways by different authors, and different studies have reported different results. Some studies
showed one-way causal relationship between returns and volume, i.e., there exists a
unidirectional causality. It runs from returns to volume or volume to returns. Chen et al.
(2001) studied the causal relation among stock returns, trading volume, and volatility using
daily data for nine major markets, i.e., London, Paris, Toronto, New York, Tokyo, Milan, Hong
Kong, Zurich, and Amsterdam. The results show that return Granger-causes volume but not
vice versa. Further, the study concluded that F-statistics are significant for eight countries
out of the nine markets studied.
Ravindra and Wang (2006) studied the causal relationship between stock indices and
trading volume of Asian markets by using data of six Asian countries for a period of 34
months. The results show that causality extends from stock indices return to trading volume
in South Korean markets, while an opposite phenomenon was observed in the Taiwanese
market. Pisedtasalasai and Gunasekarage (2008) found causal relationship between returns
and volume in five countriesthe Philippines, Singapore Indonesia, Malaysia and Thailand
by using the VAR and GARCH techniques. The results showed that unidirectional causality
running from returns to volume exists in four countries. Further, no results could be derived
for the Philippines.
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The IUP Journal of Financial Risk Management, Vol. XII, No. 4, 2015

Abdelgader et al. (2011) studied the relationship between stock return, trading volume
and market volatility for the seven Gulf Cooperation Council. They found that returns lead
volume in five out of the seven markets. Further, good news has different impact on market
volatility than bad news. Kant (2011) examined the relationship between stock prices and
trading volume of 347 stocks. The results showed that there is a high degree of causality
between stock return and trading volume in Indian stock market. 66% of the stocks indicate
that return causes volume, 3.3% stocks indicate that volume causes return, 3.7% stocks
indicate bidirectional causation, and the remaining 27% show no causation at all.
Two-way relation between volume and returns, i.e., return causes volume and volume
causes return, was reported by many studies. The relationship between volume and changes
in returns for individual NYSE stocks was evaluated by Harris (1987). He found that there
was a two-way causal relationship between returns and volume. The causal relationship
between trading volume and return using individual stock transactions data was analyzed by
Smirlock and Starks (1988). Their results indicate that a positive lagged relationship exists
between volume and absolute price changes. The causal relationship between trading volume
and stock return volatility was also examined by Karpoff (1987) and Gunduz and Hatemi
(2005). They found that strong links exist between trading and stock return volatility. Moosa
and Al-Loughani (1995) examining the causal relationship for four Asian stock market
showed that a bidirectional causality existed for Malaysia, Thailand and Singapore.
From his research on Toronto Stock Exchange, Ciner (2002) documented a positive
contemporaneous relation between volume and absolute returns both before and after
automation. An empirical relationship between stock return, trading volume and volatility
for the selected Asia-Pacific stock market including seven national stock markets was
discovered by Malabika et al. (2008). They used data from January 1, 2004 to March 31, 2008.
The results of Granger causality test showed that volume causes return and return causes
volume. Through this they found that the sign and size of new information shocks have
conditional and similar effects on trading volume. Further, it was observed that the feedback
system existed between trading volume and stock return in Hong Kong, Indonesia, Malaysia
and Taiwan. Khan and Rizwan (2008) highlighted the existence of dynamic relationship
between stock return and trading volume. The study pointed out that the positive
contemporaneous relationship between trading volume and return is obtained after taking
heteroscedasticity into account.
The nature of returns and volatility spillovers between exchange rates and stock rate was
analyzed by Manish (2013) by investigating the issue for three emerging economies, India,
Brazil and South Africa. To find out the relationship between the exchange rate and stock
index and to predict the future movement, he applied multivariate GARCH model and
found the existence of bidirectional volatility spillover between stock and foreign exchange
markets in the IBSA countries. Herbert (1995) found that lagged trading volume contains
predictive powers over current price volatility. He applied the Granger causality test to examine
the causal relationship between trading volume and stock return volatility.
The Volume-Returns Relationship in the Indian Stock Market

37

Bremer and Hiraki (1999) highlighted that trading volume is a useful signal for predicting
subsequent stock returns. Using data from Tokyo stock exchange on an average basis, a complex
relation between lagged trading volume and stock return volatility was revealed by them.
This lagged trading volume contains important information about price changes. Further,
Kim (2005) and Mahajan and Singh (2009) found that trading volume Granger-causes return
volatilities.
Some studies failed to find any significant relationship between return and volume
volatility. The relationship between price changes and trading volume in the Indian stock
market was examined by Mittal (1995). He found that a positive relationship may be observed
between stock price changes and trading volume, while stock price changes and trading
volumes were found to be not significantly correlated. Darrat et al. (2003) found that no
significant contemporaneous correlation exists between trading volume and return volatility,
taking data of individual DJIA stocks. The causality test results indicated that for 12 out of
the 30 stocks analyzed, a significant causality flows from trading volume to return volatility.
The linear as well as nonlinear relationship between trading volume and return and between
volatility and return was examined by Kumar and Thenmozhi (2012). He also found that
volume does not influence stock returns and volatility occurs in the market due to the
trading strategies of the investors.
Gurgul (2005) studied the relationship between stock returns and trading volume. He
found that series on trading activities have little additional explanatory power for subsequent
price changes over that already contained in the price series. The impact of the introduction
of NIFTY index futures on the volatility of the Indian spot markets was studied by Debasish
(2009) using the econometric models. He stated that spot returns volatility is less important
in explaining spot returns after the advent of futures trading in NSE NIFTY.

Objectives
The present study aims to assess:

The causal relationship between trading volume and stock market returns of S&P
CNX NIFTY and SENSEX.

The causal relationship in relation to current market returns and previous day
volume of S&P CNX NIFTY and SENSEX.

The causal relationship in relation to current volume and previous day return of
S&P CNX NIFTY and SENSEX.
For the purpose of the study, the following hypotheses were framed and tested:
H 1 : Return does not Granger-cause volume in S&P CNX NIFTY and SENSEX.
H 2 : Volume does not Granger-cause return in S&P CNX NIFTY and SENSEX.
H 3 : Previous day volume does not Granger-cause current market returns of S&P CNX
NIFTY and SENSEX.
H 4 : Previous day market return does not Granger-cause current volume.
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The IUP Journal of Financial Risk Management, Vol. XII, No. 4, 2015

Data and Methodology

Data
The study makes use of secondary data from April 1, 2002 to March 31, 2012. PROWESS
database and websites of BSE and NSE have been used to collect the data. The daily data of
the stock returns has been calculated by using the following formula:
Rt

= ln(Pt / Pt 1)

Pt

= Present days closing price

Pt1 = Previous days closing price

The data has been computed as log of ratio of present days closing price to previous days
closing price. Further, in the present study, two indicesS&P CNX NIFTY and Sensitive
Index (SENSEX)have been taken as a proxy for the market.
S&P CNX NIFTY includes 50 most liquid stocks. Moreover, its turnover is comparatively
higher with regard to other stock indices in Indian stock market. Further, BSE (SENSEX)
being the oldest and premier stock exchange of India includes 30 most liquid stocks. Therefore,
SENSEX and S&P CNX NIFTY are considered as the representative indices of the Indian
stock market.

Methods
The following tests have been used in the study using EViews7 statistical software:

Descriptive Statistics: It includes standard deviation, skewness and kurtosis, and

Jarque-Bera test.

Correlation provides the degree of linear relationship between return and volume
series.

Unit Root Test: The variables in a regression model must be stationary. Therefore
Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests were used to check
stationarity in the series.

Granger causality examines the causal relationship between the volume and return
series in the short run. It also explains whether one series is able to predict another
series.

Results and Discussion

The causal relationship between the stock returns and trading volume provides valuable
information on the microstructure functioning of capital market.

Descriptive Statistics
Table 1 presents the descriptive statistics of return and volume series. Standard deviation of
SENSEXs volume and return are 530.1831 and 1.642691 respectively. The variation of
SENSEXs volume is more than that in returns, i.e., volume is more volatile as compared to
The Volume-Returns Relationship in the Indian Stock Market

39

returns of the SENSEX. Further, standard deviation of S&P CNX NIFTYs volume and return
are 2716.638 and 1.657590 respectively. The results show that volume series is more volatile
than return series. Both the indicators SENSEX and S&P CNX NIFTY are found to be highly
volatile. Skewness shows the symmetrical distribution of the series. Results show that the
empirical distribution of the return and volume series is positively skewed. It indicates the
right tail of distribution and shows asymmetry. Moreover, the excess kurtosis for return series
implies a more peaked (leptokurtic) curve than the normal curve. Jarque-Bera test indicates
that the sample indices are not normally distributed.
Table 1: Descriptive Statistics of Volume and Return Data
Sensitive Index (SENSEX)

S&P CNX NIFTY

Volume ( cr)

Returns (%)

Volume ( cr)

Returns (%)

Mean

1057.438

0.078035

4839.545

0.075370

Median

957.9000

0.120000

4292.370

0.140000

Maximum

5901.240

17.34000

26002.26

17.74000

Minimum

43.77000

11.14000

113.9900

12.24000

SD

530.1831

1.642691

2716.638

1.657590

Skewness

1.573171

0.168404

0.916325

0.019608

Kurtosis

8.906415

11.57443

4.684859

12.41234

Jarque-Bera

4663.259

7667.175

645.2997

9224.815

Probability

0.000000

0.000000

0.000000

0.000000

2,499

2,499

2,499

2,499

Observations

Correlation Analysis
Table 2 presents the linear Karl Pearson correlation results between stock return and trading
volume of SENSEX and S&P CNX NIFTY from year April 1, 2002 to March 31, 2012.
It is observed that stock returns and trading volume of SENSEX are significant, but negatively
correlated to each other at 1% level (the p-value is less than 0.01). In the case of S&P CNX
NIFTY also the trading volume and stock returns are significant, but negatively correlated to
Table 2: Correlation Between Trading Volume and Stock Return
Variables

Sensitive Index (SENSEX)

S&P CNX NIFTY

Trading Volume

Stock Returns

Trading Volume

Stock Returns

Trading Volume

0.054** (0.007)

0.040* (0.043)

Stock Returns

0.054** (0.007)

0.040* (0.043)

Note: * Correlation is significant at 5% level (two-tailed); ** Correlation is significant at 1% level (twotailed); and figures in parentheses show p-values.

40

The IUP Journal of Financial Risk Management, Vol. XII, No. 4, 2015

each other at 5% level of significance. Other studies do not find a contemporaneous relation
between return and volume in equity markets (Karpoff, 1987; and Ciner, 2002).

Previous Days Trading Volume and Current Stock Returns

Table 3 shows the correlation between the previous days trading volume and current stock
returns of SENSEX and S&P CNX NIFTY. In the case of SENSEX, the p-value is higher than
0.05, which implies insignificant negative correlation between previous days trading volume
and stock returns. Similarly S&P CNX NIFTY also shows insignificant and negative
correlation between previous days trading volume and stock returns. Thus, it can be inferred
that the indices vary significantly while making strategies regarding previous days trading
volume and current stock returns.
Table 3: Correlation Between Previous Days Trading Volume and Current Stock Returns
Sensitive Index (SENSEX)
Variables

S&P CNX NIFTY

Previous Days
Trading Volume

Current Stock
Returns

Previous Days
Trading Volume

Current Stock
Returns

Previous Days
Trading Volume

0.014 (0.477)

0.005 (0.786)

Current Stock
Returns

0.014 (0.477)

0.005 (0.786)

Note: Correlation is significant at 5% level (two-tailed); and figures in parentheses show p-values.

Previous Days Return and Current Stock Returns

Table 4 shows that positive correlation exists between previous days return and current
stock market return. The p-values with respect to SENSEX and S&P CNX NIFTY are 0.001
and 0.002 respectively, which implies significant at 1% level of significance. Thus, it can be
inferred that the indices do not vary significantly while making strategies regarding previous
days return and current stock return.
Table 4: Correlation Between Previous Days Return and Current Stock Returns
Sensitive Index (SENSEX)
Variables

S&P CNX NIFTY

Previous Days
Returns

Current Stock
Returns

Previous Days
Returns

Current Stock
Returns

Previous Days
Returns

0.068** (0.001)

0.063** (0.002)

Current Stock
Returns

0.068** (0.001)

0.063** (0.002)

Note: **Correlation is significant at the 0.01 level (Two-tailed); Figures in parentheses show p-values.

Previous Days Returns and Current Trading Volume

Table 5 shows the linear relationship between previous days returns and current trading
volume of SENSEX and S&P CNX NIFTY. It is observed that insignificant (the p-values are
higher than 0.05) positive correlation exists.
The Volume-Returns Relationship in the Indian Stock Market

41

Table 5: Correlation Between Previous Days Returns and Current Trading Volume
Sensitive Index (SENSEX)

S&P CNX NIFTY

Variables

Previous Days
Returns

Current Trading
Volume

Previous Days
Returns

Current Trading
Volume

Previous Days
Returns

0.012 (0.535)

0.018 (0.372)

Current Trading
Volume

0.012 (0.535)

0.018 (0.372)

Note: Correlation is significant at 0.05 level (two-tailed); and figures in parentheses show p-values.

Previous Days Volume and Current Volume

Table 6 indicates the relationship between previous days volume and current volume of
SENSEX and S&P CNX NIFTY. The results reveal that previous days volume and current
volume are significantly and positively correlated to each other, as evident from the p-value
which is less than 0.01. Therefore, it can be inferred that the indices do not vary significantly
while making strategies regarding previous days trading volume and current volume. Thus,
the strategies regarding previous days trading volume and current volume for these stock
indices should be the same.
Table 6: Correlation Between Previous Days Volume and Current Volume
Sensitive Index (SENSEX)
Variables

S&P CNX NIFTY

Previous Days
Volume

Current
Volume

Previous Days
Volume

Current
Volume

Previous Days
Volume

0.858** (0.000)

0.735** (0.000)

Current Volume

0.858** (0.000)

0.735** (0.000)

Note: **Correlation is significant at 0.01 level (two-tailed); and figures in parentheses show p-values.

Unit Root Tests

Table 7 presents the results of ADF and PP unit root tests. The ADF and PP tests are applied
with an intercept term included in the regression equation. The Akaike Information Criterion
(AIC) is used to find out the proper lag order for the ADF test. The computed ADF test
statistic values (t) with respect to SENSEXs volume is 17.47334 and return is 5.703973.
It is smaller than the critical values 3.432, 2.862, 2.567 at 1%, 5% and 10% significant
levels, respectively. Therefore, we reject the null hypothesis and it implies that both the
volume and return series do not have unit root. The series are stationary at 1%, 5% and 10%
significance levels. ADF test statistics values (t) with respect to S&P CNX NIFTY (17.49635
and 3.782284) are smaller than the critical values 3.432, 2.862, 2.567 at 1%, 5% and 10%
significant levels respectively. Therefore, we reject the null hypothesis and it implies that the
return and volume series in S&P CNX NIFTY do not have unit root. Thus, both the series are
stationary at 1%, 5% and 10% significance levels.
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The IUP Journal of Financial Risk Management, Vol. XII, No. 4, 2015

Table 7: ADF and PP Unit Root Tests

Test/Series

Sensitive Index (SENSEX)

S&P CNX NIFTY

Volume ( cr)

Returns (%)

Volume ( cr)

Returns (%)

17.47334*

5.703973*

17.49635*

3.782284*

Critical Value 1%

3.432781

3.432781

3.432781

3.432781

Critical Value 5%

2.862500

2.862500

2.862500

2.862500

Critical Value 10%

2.567326

2.567326

2.567326

2.567326

46.64677*

32.82292*

46.91377*

18.00041*

Critical Value 1%

3.432774

3.432774

3.432774

3.432774

Critical Value 5%

2.862497

2.862497

2.862497

2.862497

Critical Value 10%

2.567324

2.567324

2.567324

2.567324

Interpretation

Stationary

Stationary

Stationary

Stationary

ADF Statistic

PP Statistic

Note: * indicates the rejection of the null hypothesis (H0 = The variable is non-stationary) at 1%, 5% and 10%
levels of significance.

Newey-West method using Bartlett Kernel is used for choosing the bandwidth for PP test.
The results show that both the series, i.e., S&P CNX NIFTY and SENSEX are stationary at
1%, 5% and 10% significance levels. Thus, it can be inferred that all the series are stationary.

Granger Causality Test

Table 8 shows the result of Granger causality Test. The probability values shown in the table
imply that return does not Granger-cause volume, and the null hypothesis can be rejected for
SENSEX as well as S&P CNX NIFTY. Therefore, it can be inferred that returns contain
significant information for volume.
The hypothesis that volume does not Granger-cause return can be rejected for SENSEX.,
while it cannot be rejected for S&P CNX NIFTY. Therefore, bidirectional causality exists in
the case of SENSEX, while for S&P CNX NIFTY causality runs one way.
The hypothesis that previous days volume does not Granger-cause current return can be
rejected for SENSEX. Further, the hypothesis that previous days return does not Grangercause current volume can also be rejected for SENSEX. Therefore, there exists a causal
relationship between previous days volume to current return and previous days return to
current volume in the case of SENSEX.
In the case of S&P CNX NIFTY, the hypothesis that previous days volume does not
Granger-cause current return and previous days return does not Granger-cause current
volume cannot be rejected. Therefore, there does not exist a causal relationship between
previous days volume to current return and previous days return to current volume in the
case of S&P CNX NIFTY.
The Volume-Returns Relationship in the Indian Stock Market

43

Table 8: Granger Causality Test Results

Null Hypothesis

Sensitive Index (SENSEX)

S&P CNX NIFTY

F-Statistic

Probability

F-Statistic

Probability

Return does not Grangercause volume

2.81039*

0.004

3.94773*

0.000

Volume does not Grangercause return

3.00287*

0.002

1.66947

0.100

Previous days volume

does not Granger-cause
current return

2.98214

0.002

1.42808

0.179

Previous days return does

not Granger-cause
current volume

2.22738

0.023

1.74449

0.0835

Note: * Significant at 1% level.

Conclusion
The present study analyzed the causal relationship between stock returns and trading volume
in Indian stock market. Daily data of the volume and return series of S&P CNX NIFTY and
SENSEX were studied for a period of 10 years from April 1, 2002 to March 31, 2012. ADF and
PP unit root tests show that the return and volume series in S&P CNX NIFTY and SENSEX do
not have unit root and both the series are stationary at 1%, 5% and 10% significance levels.
The results of the correlation show that trading volume and stock returns of SENSEX and
S&P CNX NIFTY are significant, but negatively correlated to each other. Further, it shows
that there is a strong correlation between previous days volume and current volume, previous
days return and current stock return in the case of both SENSEX and S&P CNX NIFTY.
Further, the correlation between the previous days return and current trading volume is
insignificant but positive for both S&P CNX NIFTY and SENSEX. The results of correlation
between previous days trading volume and current stock return show that it is negative but
insignificant in both the cases, i.e., S&P CNX NIFTY and SENSEX.
In the case of SENSEX, the causality runs in both the directions, i.e., return causes volume
and volume causes return, i.e., bidirectional causality exists. But in the case of S&P CNX
NIFTY, causality runs one way. The hypothesis that volume does not Granger-cause return
cannot be rejected for S&P CNX NIFTY.
Further, it is found that previous days return and current stock returns are positively
correlated and strongly support each other in both S&P CNX NIFTY and SENSEX.
The movement in stock market can be decided only when trading volume and stock
returns are studied simultaneously. They are the two major pillars of stock market. We need to
study both the variables together to know the transparent map of the movement in the stock
market. In fact the study of one indicator conveys vague information about stock market
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The IUP Journal of Financial Risk Management, Vol. XII, No. 4, 2015

activity and cannot be used as an information signal. A strong relationship between trading
volume and stock return has been found by various researchers (Richard et al., 1993; Karpoff,
1987; Jain and Joh, 1988; and Gunduz and Hatemi, 2005), whenever the flow of information
is most volatile. Further the investors, brokers, researchers, policy makers and portfolio
managers are interested in the relationship for shifting their positions as per the movement
of market. It provides guidelines to them for taking rational investment decisions and to
meet their expectation level with actual return from the securities held by them. It will
benefit in modeling and forecasting short-run returns and volatility. The dependence of
return on past returns, past volume and current volume always raises questions for investors
decisions. The dynamic and causal relationship between trading volume and stock return
volatility helps to understand the future movement of the market.

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The Volume-Returns Relationship in the Indian Stock Market

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