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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

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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  • Alsubaie, Abdullah & Najand, Mohammad, 2009. "Abnormal trading volume and autoregressive behavior in weekly stock returns in the Saudi stock market," Emerging Markets Review, Elsevier, vol. 10(3), pages 207-225, September.
    • Handle: RePEc:eee:ememar:v:10:y:2009:i:3:p:207-225
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    References listed on IDEAS

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    1. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 905-939.
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    5. 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.
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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.
    2. Bartosz Gębka & Dobromił Serwa, 2012. "Liquidity needs, private information, feedback trading: verifying motives to trade," NBP Working Papers 119, Narodowy Bank Polski.
    3. Gębka, Bartosz & Serwa, Dobromił, 2015. "The elusive nature of motives to trade: Evidence from international stock markets," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 147-157.
    4. Jahan-Parvar, Mohammad R. & Mohammadi, Hassan, 2013. "Risk and return in the Tehran stock exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(3), pages 238-256.
    5. Sabbaghi, Omid, 2011. "Asymmetric volatility and trading volume: The G5 evidence," Global Finance Journal, Elsevier, vol. 22(2), pages 169-181.

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