On the Relationship between Stock Returns and Trading Volume: A Case Study

Abstract

This article focuses on the experiment about the causality relationship between the stock returns and the trading volume of the member companies at Tehran Stock Market. Accordingly, the seasonal data from these companies within the years 1996 to 2009 are used to estimate the vector error correction model. The results obtained from the Philips–Perron Unit Root Test demonstrated that the above mentioned variables are integrated of the order one and thus there is a long run equilibrium relationship between them. The estimation from the error correction model proved that there is a positive and bidirectional relationship between these variables. However the stock returns has a stronger effect on the trading volume. Therefore, through a psychological analysis, the "Mass Behavior" hypothesis in the said stock market is not approved. Moreover, the estimation of the error correction coefficient indicated that balancing the said variables towards the long run equilibrium volumes, is slow.