A Comparative Analysis on the Volume-Return Relationship of the ETF and Stock Market

Abstract

This paper 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. While past research using correlation analysis and ordinary least squares method to specify a linear regression model only catches the average relationship between volume and return, this paper 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 that a symmetric volume-return relationship is found in the ETF market and an asymmetric volume-relationship, however, is discovered in the stock market. The volume-return relationship of the stock market has become more symmetric after the exempt for some stocks from the short-sale restriction. The results demonstrate that the transaction cost and the short-sale restriction are important factors to influence the patter of volume-return relationship.