Investigating Contemporaneity and Dynamism in the Relationship Between Stock Returns and Trading Volume at Nepalese Stock Market

Abstract

The returns-volume relationship depends on the rate of information flow and its diffusion to the market. Trading volume is viewed as the critical piece of information, which signals where returns will go next, which stock returns, per se, may not convey to investors. Relying on the predicting power of volume, this paper examines the contemporaneous and dynamic relationship between stock returns and trading volume by using daily-pooled panel data of 16 listed non-finance and non-insurance companies from four specific sectors of NEPSE, the only secondary market in Nepal, from July 2017 to August 2019. The study observed the significant mean difference on the stock returns and trading volume, it indicated Nepalese investors would significantly prefer some sector to the other for their investment. The study also showed the significant positive, contemporaneous relationship existing between stock returns and trading volume, when trading volume is the outcome variable. Furthermore, the lagged stock-returns also the significant and positive relationship with trading volume and vice versa, and it is the evidence against MDH (Mixture of Distribution Hypotheses), and, instead, in support of the SIAH (Sequential Information Arrival Hypotheses).