The dynamic relationship between stock returns and trading volumes in Nepalese stock market

  • Prem Lal Adhikari Padmakanya Multiple Campus, Faculty of Management, Tribhuvan University
Keywords: Trading volume, stock returns, Nepal Stock Exchange, Granger Causality test

Abstract

 In finance, the relationship between stock returns and trading volume has been the subject of extensive research over the past years. The main motivation for these studies is the central role that trading volume plays in the pricing of financial assets when new information comes in. As being interrelated and interdependent subjects, a study regarding the trading volume and stock returns seem to be vital. It is a well-researched area in developed markets. However, very few pieces of literature are available regarding the Nepalese stock market that explores the association between trading volume and stock return. Realizing this fact, this paper aims to examine the empirical relationship between trading volume and stock returns in the Nepalese stock market using time series data. The study sample is comprised of 49 stocks traded on the Nepal Stock Exchange (NEPSE) from mid-July 2011 to mid-July 2018. This study examines the Granger Causality relationship between stock returns and trading volume using the bivariate VAR model used by de Medeiros and Van Doornik (2008). The study found that the overall Nepalese stock market does not have a causal relationship between trading volume and return on the stock. In the case of sector-wise study, there is a unidirectional causality running from trading volume to stock returns in commercial banks and stock returns to trading volume in finance companies, hydropower companies, and insurance companies. There is no indication of any causal effect in the development bank, hotel, and other sectors. This study also finds that there is no evidence of bidirectional causality relationships in any sector of the Nepalese stock market.

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Author Biography

Prem Lal Adhikari, Padmakanya Multiple Campus, Faculty of Management, Tribhuvan University

Lecturer

Published
2020-12-31
How to Cite
Adhikari, P. (2020). The dynamic relationship between stock returns and trading volumes in Nepalese stock market. Management Dynamics, 23(2), 161-172. https://doi.org/10.3126/md.v23i2.35819
Section
Articles