Contemporaneous and Causal Relationship between Returns and Volumes: Evidence from Nifty Futures

• Author: Aravind Sampath,Parth Garg
• DOI: http://doi.org/10.1111/irfi.12175
• Published date: 01 September 2019
• Date: 01 September 2019

Contemporaneous and Causal

Relationship between Returns and

Volumes: Evidence from Nifty

Futures

ARAVIND SAMPATH

†

AND PARTH GARG

‡

†

Finance, Accounting & Control Area, Indian Institute of Management, Kozhikode,

India and

‡

Indian Institute of Management, Kozhikode, India

ABSTRACT

Motivated by the mixture of distribution hypothesis (MDH) and sequential

arrival of information hypothesis (SAIH), we investigate the relationship

between intraday returns and volumes using derivatives data from the

emerging Indian market. Using robust statistical estimation, we document

the evidence of both MDH and SAIH in one of the most traded financial mar-

kets in India (and the world). We document the presence of strong positive

association between returns and volumes. We further report the evidence of

strong causality from intraday returns to volumes than vice versa.

JEL Codes: C22; G12; G14; G15

Accepted: 18 December 2017

I. INTRODUCTION

The dynamics between asset returns and trading volumes has been a major

source of discussion across several studies throughout the last four decades.

When information about an asset is public, it is immediately reflected as prices

and volumes. When private information moves prices, trading volumes mask

such information, yet move prices latently. The dynamics between returns and

volumes essentially captures information flow (fundamental and liquidity) in

the market. Copeland (1976) was one of the first to document sequential arrival

of information hypothesis (SAIF) suggesting presence of a lead–lag relationship

between returns and volumes. Simultaneously, Clark (1973) and Epps and Epps

(1976)

1

posited the presence of positive contemporaneous correlation between

returns and volumes, called the mixture of distribution hypothesis (MDH).

Karpoff (1986, 1987) in his seminal articles outlined the asymmetric relation-

ship between trading volumes and volatility. In recent years, several articles

1 Later Tauchen and Pitts (1983), Andersen (1996) also added to this theory.

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 19:3, 2019: pp. 653–664

DOI: 10.1111/irfi.12175