A Comparative Analysis on the Volume-Return Relationship of the Exchange-Traded Fund and the Stock Market

Abstract

This article aims to examine the contemporaneous relationship between trading volume and returns in the Taiwan exchange-traded fund (ETF) market, taking the stock market as a contrast. Whereas past research using correlation analysis and ordinary least squares method to specify a linear regression model catches only the average relationship between volume and return, this article applies the quantile regression analysis to provide a more complete description for the volume-return relationship in the ETF and stock markets. The empirical results show a symmetric volume-return relationship in the ETF market and an asymmetric volume-relationship in the stock market when the short-sale uptick rule is still applicable for all listed stocks. The volume-return relationship of the stock market became more symmetric after the elimination of the uptick rule on short sales for high-cap stocks and, at last, for the entire listed stocks. The results demonstrate that transaction costs and the short-sale restriction are important factors in influencing the pattern of the volume-return relationship.