A Test On Causality between Trading Volume and Stock Prices in the Individual Companies: Focusing on Korean Stock Market
Authors:   Asia-Europe Perspective Association, Ryu Hyungseon , Yang Sungkuk , Kim Bonghyun 
Published: June 2018

Stock price is affected by various elements: economic factors such as the domestic or global economic trend, non-economic factors like labor dispute or war, and internal factors in company including change of major shareholders, development of new product, M&A, or capital increase with consideration. In this sense, stock price is a final result reflecting all the political, economic, and social context which is associated with the company. The relation between trading volume and stock return has been long discussed by the scholars and the financial professionals. Many researches have been tried to figure out the systematic and universal relation between those two in theoretical aspect, but it has never reached any consensus. The preceding empirical studies on the relation have shown the different conclusion depending on the sample period or the sample market. The study on the trading volume is the most active and animated field of research among the precedent studies on the determinant of stock prices. That is because trading volume and stock prices are one of the easiest information for the investors to access, and it also means that trading volume are usually assumed as an influential factor to affect the stock price or to get affected by the stock price. Trading volume helps to predict the future flow of the stock price in advance, but it also grants credibility for the flow. If the amount of trade increases and the price also increases, then it could be quite surely presumed that the price is going to rise constantly. However, if the price goes up but the trading volume goes down, then it never be accepted that the stock price will continuously rise. Rather, in most cases, the stock price stops to rise, and falls. Likewise, it is a widely accepted that trading volume is interrelated with the fluctuation in stock price. Many researchers has tried to account the relationship between trading volume and stock price from theoretical perspective in various ways, and this long concern has focused on how to gain a distinguished performance with the interest in market efficiency and the use of trading volume information. However, though there is no unanimous conclusion which accounts the relationship, most investors take it as a generalized fact that trading volume causes a change in price in such cases as trading volume increases when stock price increases, and trading volume decreases when stock price decreases. Thus, this study has a purpose on analyzing the relationship between stock prices and trading volume which are widely used as information for investment. In other words, it is for figuring out whether the trading volume has an effect on the stock price, or vice versa. Therefore, the study aims to find out the effect of the investment strategy using the trading volume information when investing the individual companies. In this paper, analysis period was taken from the daily data of 10 years which is 2,482 days from 2nd January, 2002 to 29th December, 2011 from KOSPI, and also from the daily data of 6 years which is 1,489 days from 2nd January, 2006 to 29th December, 2011 from KOSDAQ. As an analysis method, unit root test was used to distinguish whether the time series data is normal or not, and Granger Causality test also was applied to look at the causal relationship between trading volume and stock prices. The differences of this study from the precedent ones are as in this following. First, the analysis in this paper includes the top five types of market capitalization in the KOSPI market and KOSDAQ market during the sample period so as to figure out the causal relationship between trading volume and stock prices. Second, the study uses average daily trading volume which is mainly used in the preceding studies as well as 5-day, 20-day, 60-day, and 120-day average trading volume. Those various sorts of trading volumes are for finding out which type is the most suitable information to account for the reality.