Volume and the nonlinear dynamics of stock returns (Q1384940)

This book provides a theoretical and empirical study of the dynamic relationship between price and volume movements on the stock market. The book contains a total of seven chapters plus two appendices, which prove the two crucial propositions. Chapter 1 is the introduction and chapter 7 is the concluding chapter. Chapter 2 is a review of the theoretical and empirical literature pertaining to stock market efficiency, with special reference to Samuelson's and Lucas's theoretical models, as well as the auto-correlation based and the volatility empirical tests of market efficiency. Chapter 3 is the main chapter of the book. It observes that if agents are rational and differ only with respect to the information they have, then there will no trade in equilibrium. Therefore, it proposes a model in which there are reasons other than differences in information for trade. This is done by assuming that traders have differential opportunities to invest in risky assets. In this model, it is further assumed that the shocks in the economy have deterministic but time varying volatility. Chapter 4 provides numerical exercises to deduce the volume-volatility and volume-persistence relationships in the proposed model (described in Chapter 3). The numerical evidence shows that the proposed model with deterministic volatility is a good approximation of the economy with stochastic volatility. Chapter 5 undertakes an empirical investigation of the dynamic relationship between stock returns and volume of trade using non-parametric methods such as SNP estimator and nonlinear impulse response analysis. The main findings are that (1) return movements caused by dividend shocks have only a mild and short-term impact on the subsequent movements of volume; (2) there is a lack of feedback from volume to returns and (3) the impact of volatility on return and volume is symmetric. Chapter 6 further applies the EMM method to test the proposed model in order to ascertain the extent to which the model can account for the observed joint dynamics of return and trading volume. The findings are consistent with those of the existing empirical literature. In sum, this book is useful for students interested in understanding the issues pertaining to stock market efficiency. It contributes to the literature by proposing a model that allows positive trade in equilibrium.