The dynamics of the relationship between stock returns and trading volumes: An emerging markets perspective during varying market conditions

Abstract

The dynamic relationship between stock returns and trading volumes is examined during normal and crisis periods by a combining the Bai-Perron structural break test with Granger Causality test. The daily price and volume data of 4 important indices and Nifty Fifty index based companies listed on the National Stock Exchange of India Limited (NSE) are included in the study for the years 2005 to 2022. The results of this study give valuable insights into the influence of periods falling during two important crisis periods, the Global Financial Crisis and the Covid- 19 pandemic, on the nature of relationship between the variables under study. We find that the market is not permanently efficient and our findings indicate the nature of causal relationships to be closer to the postulates of adaptive market efficiency. Although the market appears efficient for the most part at the aggregate market level there are periods at sector level and firm level which are long enough for traders to profit from strategies that exploit associations between price and volume.