Abstract
This paper conducts a review of the literature on the price–volume relationship and its relation with the implications of the adaptive market hypothesis. The literature on market efficiency is classified as efficient market hypothesis (EMH) studies or adaptive market hypothesis (AMH) studies. Under each class, studies are categorized either as return predictability studies or price–volume relationship studies. Finally, review in each category is analyzed based on the methodology used. Our review shows that the literature on return predictability and price–volume relationship in classical EMH approach is extensive while studies in return predictability in the AMH approach have gained increased attention in the last decade. However, the studies in price–volume relationship under adaptive approach are limited, and there is a scope for studies in this area. Authors did not find any literature review on time-varying price–volume relationship. Authors find that there is a scope to study the nonlinear cross–correlation between price and volume using detrended fluctuation analysis (DFA)-detrended cross–correlational analysis (DXA) in the AMH domain. Further, it would be interesting to investigate whether the same cross–correlation holds across different measures of stock indices within a country and across different time scales.
Highlights
One of the core concepts in the neoclassical finance that has been extensively researched and debated is the market efficiency, and has its roots in the studies conducted by Fama (1965, 1970), Samuelson (1965) and Roberts (1967), who introduced the concepts of efficient markets and efficient market hypothesis (EMH) to the world
This means that these studies do not test the time-varying nature of the price–volume relationship, which is the important implication of the adaptive market hypothesis (AMH)
Authors find that the results of the papers either support classical or adaptive nature of markets, indicating the EMH or AMH respectively
Summary
One of the core concepts in the neoclassical finance that has been extensively researched and debated is the market efficiency, and has its roots in the studies conducted by Fama (1965, 1970), Samuelson (1965) and Roberts (1967), who introduced the concepts of efficient markets and efficient market hypothesis (EMH) to the world. The weak-form of efficiency tests whether the market prices reflect the information that already is contained in the past market data such as past prices, trading volume or short sales (Rizvi and Arshad 2017). The AMH is not formally defined, its implications have been studied to indicate the existence of the adaptive nature of the markets. Volume can reveal investor’s future risk preferences and expected returns This time-varying nature of the markets can be studied by testing whether autocorrelation between the returns or price–volume relationship changes over time. The focus of this paper is to review the literature studying weak-form, time-varying market efficiency with keeping in mind the following objectives: 1. The multifractal nature of the price and volume series implies that the relationship to vary over time, which is the implication of AMH.
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