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The Stock Return - Trading Volume Relationship in European Countries: Evidence from Asymmetric Impulse Responses

Author

Listed:
  • Ralf Brüggemann

    () (Department of Economics, University of Konstanz, Germany)

  • Markus Glaser

    () (Institute for Capital Markets and Corporate Finance, Munich School of Management, Ludwig- Maximilians-Universität München, Germany)

  • Stefan Schaarschmidt

    (Department of Economics, University of Konstanz, Germany)

  • Sandra Stankiewicz

    () (Department of Economics, University of Konstanz, Germany)

Abstract

We investigate non-linearities in the stock return - trading volume relationship by using daily data for 16 European countries in an asymmetric vector autoregressive model. In this framework, we test for asymmetries and analyze the dynamic relationship using a simulation based procedure for computing asymmetric impulse response functions. We find that stock returns have a significant influence on trading volume, but there is no evidence for the influence of trading volume on returns. Our analysis indicates that responses of trading volume to return shocks are non-linear and the sign of the response depends on the absolute size of the shock. Thus, using linear VAR models may lead to wrong conclusions concerning the return - volume relationship. We also find that after stock markets go up (down), investors trade significantly more (less) in small and mid cap stocks, supporting evidence for the theories of overconfidence, market participation, differences of opinion, and disposition effect.

Suggested Citation

  • Ralf Brüggemann & Markus Glaser & Stefan Schaarschmidt & Sandra Stankiewicz, 2014. "The Stock Return - Trading Volume Relationship in European Countries: Evidence from Asymmetric Impulse Responses," Working Paper Series of the Department of Economics, University of Konstanz 2014-24, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1424
    as

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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_24_Brueggemann-Glaser-Schaarschmidt-Stankiewicz_2014.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    asymmetric vector autoregression; asymmetric impulse response functions; stock return; trading volume;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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