Relationship between Stock Returns and Trading Volume: Domestic and Cross-Country Evidence in Asian Stock Markets

We examined the effects of trading volume on the persistence of the time-varying conditional volatility of returns and the dynamic relations between trading volume and returns (and volatility) for both domestic and cross-country markets. We considered daily prices and trading volume in four Asian stock exchanges (Korea, Japan, China, and Hong Kong). For the analysis, we used the GARCH model, which includes trading volume. To analyze whether trading volume precedes stock returns, or vice versa, we used the Granger causality test. Our major findings are as follows. First, the inclusion of trading volume in the GARCH model does not reduce the persistence of conditional variance of each of the four stock markets. Second, regarding cross-country relationships, Hong Kong financial market variables, in particular Hong Kong trading volume, have extensive predictive power for the financial markets of Japan and Korea. Third, cross-country interactions are weak, and Japan’s international stock market is substantially influenced by market variables outside of the stock markets of Korea, Hong Kong, and China.