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Abnormal trading volume and autoregressive behavior in weekly stock returns in the Saudi stock market

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  • Alsubaie, Abdullah
  • Najand, Mohammad
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    Abstract

    This paper examines the relationship between the abnormal change in trading volume of both individual stocks and portfolios and short-term price autoregressive behavior in the Saudi stock market (SSM). Our objective is to investigate the informational role that trading volume plays in predicting the direction of short-term returns. We evaluate whether the abnormal change in lagged, contemporaneous, and lead turnovers affects serial correlation in returns. Specifically, we examine if and when the change in volume produces momentum (positive correlation) or reversal (negative autocorrelation) in consecutive weekly stock returns. We find a reversal in weekly stock returns when conditioned on the change in lagged volume in the SSM. Our results are consistent for the whole sample, the two sub-sample periods, and the large- and small-firm portfolios. The results are consistent with Campbell, Grossman, and Wang [Campbell, J. Y., S. J. Grossman, and J. Wang, 1993, Trading volume and serial correlation in stock returns, Quarterly Journal of Economics, 108, 905-939], who present a model in which risk-averse market makers accommodate the selling pressure of liquidity or non-informational traders. We also find that reversal is more pronounced with the loser portfolio as specified by filter-based methodology. The overall result of this paper is also consistent with the empirical findings of Conrad, Hameed, and Niden [Conrad, J., A. Hameed, and C. Niden, 1994, Volume and autocovariances in short-horizon individual security returns, Journal of Finance 49, 1305-1329.] and Gebka [Gebka, B., 2005, Dynamic volume-return relationship: evidence from an emerging market, Applied Financial Economics, 15, 1019-1029] in which they report price reversal for stock with high trading volume.

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    Bibliographic Info

    Article provided by Elsevier in its journal Emerging Markets Review.

    Volume (Year): 10 (2009)
    Issue (Month): 3 (September)
    Pages: 207-225

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    Handle: RePEc:eee:ememar:v:10:y:2009:i:3:p:207-225

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    Web page: http://www.elsevier.com/locate/inca/620356

    Related research

    Keywords: Saudi stock market (SSM) Trading volume Liquidity traders MRTO;

    References

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    1. Lehmann, Bruce N, 1990. "Fads, Martingales, and Market Efficiency," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 1-28, February.
    2. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1992. "Trading Volume and Serial Correlation in Stock Returns," NBER Working Papers 4193, National Bureau of Economic Research, Inc.
    3. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
    4. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2001. "Dynamic Volume-Return Relation of Individual Stocks," NBER Working Papers 8312, National Bureau of Economic Research, Inc.
    5. Hammoudeh, Shawkat & Li, Huimin, 2008. "Sudden changes in volatility in emerging markets: The case of Gulf Arab stock markets," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 47-63.
    6. Cooper, Michael, 1999. "Filter Rules Based on Price and Volume in Individual Security Overreaction," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 901-35.
    7. Bartosz Gebka, 2005. "Dynamic volume-return relationship: evidence from an emerging capital market," Applied Financial Economics, Taylor & Francis Journals, vol. 15(14), pages 1019-1029.
    8. Bruce N. Lehmann, 1988. "Fads, Martingales, and Market Efficiency," NBER Working Papers 2533, National Bureau of Economic Research, Inc.
    9. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. " Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, vol. 49(1), pages 153-81, March.
    10. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February.
    11. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June.
    12. Brooks, Robert, 2007. "Power arch modelling of the volatility of emerging equity markets," Emerging Markets Review, Elsevier, vol. 8(2), pages 124-133, May.
    13. Conrad, Jennifer & Kaul, Gautam & Nimalendran, M., 1991. "Components of short-horizon individual security returns," Journal of Financial Economics, Elsevier, vol. 29(2), pages 365-384, October.
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    Cited by:
    1. Jahan-Parvar, Mohammad R. & Waters, George A., 2010. "Equity price bubbles in the Middle Eastern and North African Financial markets," Emerging Markets Review, Elsevier, vol. 11(1), pages 39-48, March.

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