Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-25T07:33:01.463Z Has data issue: false hasContentIssue false
  • English
  • Français

The Relation between Price Changes and Trading Volume: A Survey

Published online by Cambridge University Press:  06 April 2009

Jonathan M. Karpoff
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper reviews previous and current research on the relation between price changes and trading volume in financial markets, and makes four contributions. First, two empirical relations are established: volume is positively related to the magnitude of the price change and, in equity markets, to the price change per se. Second, previous theoretical research on the price-volume relation is summarized and critiqued, and major insights are emphasized. Third, a simple model of the price-volume relation is proposed that is consistent with several seemingly unrelated or contradictory observations. And fourth, several directions for future research are identified.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 22 , Issue 1 , March 1987 , pp. 109 - 126
Copyright
Copyright © School of Business Administration, University of Washington 1987

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Asquith, P., and Krasker, W. S.. “Changes in Dividend Policy, Trading Volume, and Investor Clienteles.” Working Paper, Harvard Business School (01 1984).Google Scholar
[2]Bamber, L. S. “On the Relationship between Quarterly Earnings ‘Surprises’ and Trading Volume.” Working Paper, Univ. of FL (08 1985).Google Scholar
[3]Bamber, L. S. “The Information Content of Annual Earnings Releases: A Trading Volume Approach.” Journal of Accounting Research, 24 (Spring 1986), 40–56.CrossRefGoogle Scholar
[4]Banks, D. “Information Uncertainty and Trading Volume.” The Financial Review, 20 (02 1985), 83–94.CrossRefGoogle Scholar
[5]H., Beaver W. “The Information Content of Annual Earnings Announcements.” Empirical Research in Accounting: Selected Studies. Supplement to Journal of Accounting Research, 6 (1968), 67–92.Google Scholar
[6]Brada, J.; Ernst, H.; and Tassel, J. Van. “The Distribution of Stock Price Differences: Gaussian after All?” Operations Research, 14 (03–04 1966), 334–340.CrossRefGoogle Scholar
[7]Bradfield, J. “A Formal Model of Market-Making.” Journal of Financial and Quantitative Analysis, 14 (06 1979), 275–291.CrossRefGoogle Scholar
[8]Carpenter, M. D., and Upton, D. E.. “Trading Volume and Beta Stability.” The Journal of Portfolio Management, 1 (Winter 1981), 60–64.CrossRefGoogle Scholar
[9]Christie, A. “On Information Arrival and Hypothesis Testing in Event Studies.” Working Paper, Univ. of Rochester (08 1983).Google Scholar
[10]Clark, P. K. “A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices.” Econometrica, 41 (01 1973), 135–155.CrossRefGoogle Scholar
[11]Cohen, K.; Maier, S. F.; Schwartz, R. A.; and Whitcomb, D. K.. “Market Makers and the Market Spread: A Review of Recent Literature.” Journal of Financial and Quantitative Analysis, 14 (11 1979), 813–835.CrossRefGoogle Scholar
[12]Comiskey, E. E.; Walkling, R. A.; and Weeks, M. A.. “Dispersion of Expectations and Trading Volume.” Working Paper, GA Inst. of Tech. (08 1984).Google Scholar
[13]Copeland, T. E., and Galai, D.. “Information Effects on the Bid-Ask Spread.” Journal of Finance, 31 (12 1983), 1457–1469.Google Scholar
[14]Conroy, R. M., and Winkler, R. L.. “Informational Difference between Limit and Market Orders for a Market Maker.” Journal of Financial and Quantitative Analysis, 16 (12 1981), 703–724.CrossRefGoogle Scholar
[15]Copeland, T. E. “A Model of Asset Trading under the Assumption of Sequential Information Arrival.” Journal of Finance, 31 (09 1976), 1149–1168.CrossRefGoogle Scholar
[16]Copeland, T. E. “A Probability Model of Asset Trading.” Journal of Financial and Quantitative Analysis, 12 (11 1977), 563–578.CrossRefGoogle Scholar
[17]Cornell, B. “The Relationship between Volume and Price Variability in Futures Markets.” The Journal of Futures Markets, 1 (Fall 1981), 303–316.CrossRefGoogle Scholar
[18]Crouch, R. L. “A Nonlinear Test of the Random-Walk Hypothesis.” American Economic Review, 60 (03 1970), 199–202.Google Scholar
[19]Crouch, R. L. “The Volume of Transactions and Price Changes on the New York Stock Exchange.” Financial Analysts Journal, 26 (07–08 1970), 104–109.CrossRefGoogle Scholar
[20]Epps, T. W. “Security Price Changes and Transaction Volumes: Theory and Evidence.” American Economic Review, 65 (09 1975), 586–597.Google Scholar
[21]Epps, T. W. “The Demand for Brokers' Services: The Relation between Security Trading Volume and Transaction Cost.” Bell Journal of Economics, 1 (Spring 1976), 163–194.CrossRefGoogle Scholar
[22]Epps, T. W. “Security Price Changes and Transaction Volumes: Some Additional Evidence.” Journal ofFinancial and Quantitative Analysis, 12 (03 1977), 141–146.CrossRefGoogle Scholar
[23]Epps, T. W. “Security Price Changes and Transaction Volumes: Reply.” American Economic Review, 68 (09 1978), 698–700.Google Scholar
[24]Epps, T. W., and Epps, M. L.. “The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis.” Econometrica, 44 (03 1976), 305–321.CrossRefGoogle Scholar
[25]Fama, E. F. “The Behavior of Stock Market Prices.” Journal of Business, 38 (01 1965), 34–105.CrossRefGoogle Scholar
[26]Foster, G. “Stock Market Reaction to Estimates of Earnings per Share by Company Officials.” Journal of Accounting Research, 11 (Spring 1973), 25–37.CrossRefGoogle Scholar
[27]Garman, M. B. “Market Microstructure.” Journal of Financial Economics, 3 (06 1976), 257–275.CrossRefGoogle Scholar
[28]Godfrey, M. D.; Granger, C. W. J.; and Morgenstern, O.. “The Random Walk Hypothesis of Stock Market Behavior.” Kyklos, 17 (Fasc. 1, 1964), 1–30.CrossRefGoogle Scholar
[29]Grammatikos, T., and Saunders, A.. “Futures Price Variability: A Test of Maturity and Volume Effects.” Journal of Business, 59 (04 1986), 319–330.CrossRefGoogle Scholar
[30]Granger, C. W. J., and Morgenstern, O.. “Spectral Analysis of New York Stock Market Prices.” Kyklos, 16 (Fasc. 1 1963), 1–27.CrossRefGoogle Scholar
[31]Granger, C. W. J., and Morgenstern, O.. Predictability of Stock Market Prices. Lexington, MA: Heath Lexington Books (1970).Google Scholar
[32]Grundy, B. “Trading Volume and Stock Returns around Ex-Dividend Dates.” Working Paper, Univ. of Chicago (01 1985).Google Scholar
[33]Hanna, M. “Security Price Changes and Transaction Volumes: Additional Evidence.” American Economic Review, 68 (09 1978), 692–695.Google Scholar
[34]Harris, L. “The Joint Distribution of Speculative Prices and of Daily Trading Volume.” Working Paper, Univ. of Southern CA (05 1983).Google Scholar
[35]Harris, L. “Transactions Data Tests of the Mixture of Distributions Hypothesis.” Working Paper, Univ. of Southern CA (04 1984).Google Scholar
[36]Harris, L. “Cross-Security Tests of the Mixture of Distributions Hypothesis.” Journal of Financial and Quantitative Analysis, 21 (03 1986), 39–46.CrossRefGoogle Scholar
[37]Harris, L., and Gurel, E.. “Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures.” Journal of Finance, 41 (09 1986), 815–829.CrossRefGoogle Scholar
[38]Jain, P. C., and Joh, G.. “The Dependence between Hourly Prices and Trading Volume.” Working Paper, The Wharton School, Univ. of PA (09 1986).Google Scholar
[39]James, C., and Edmister, R. O.. “The Relation between Common Stock Returns Trading Activity and Market Value.” Journal of Finance, 38 (09 1983), 1075–1086.CrossRefGoogle Scholar
[40]Jennings, R. H., and Barry, C.. “Information Dissemination and Portfolio Choice.” Journal of Financial and Quantitative Analysis, 18 (03 1983), 1–19.Google Scholar
[41]Jennings, R. H., and Barry, C.. “On Information Dissemination and Equilibrium Asset Prices: A Note.” Journal of Financial and Quantitative Analysis, 19 (12 1984), 395–402.CrossRefGoogle Scholar
[42]Jennings, R. H.; Starks, L. T.; and Fellingham, J. C.. “An Equilibrium Model of Asset Trading with Sequential Information Arrival.” Journal of Finance, 36 (03 1981), 143–161.Google Scholar
[43]Karpoff, J. M. “Costly Short Sales and the Correlation of Returns with Volume.” Working Paper, Univ. of WA (10 1985).Google Scholar
[44]Karpoff, J. M. “A Theory of Trading Volume.” Journal of Finance, 41 (12 1986), 1069–1088.CrossRefGoogle Scholar
[45]Kelles, G. J. “Demand, Supply, Price Change and Trading Volume on Financial Markets of the Matching Order Type.” Unpubl. Ph.D. Diss., Katholieke Universiteit Leuven (1980).Google Scholar
[46]Kiger, Jack E. “An Empirical Investigation of NYSE Volume and Price Reactions to the Announcement of Quarterly Earnings.” Journal of Accounting Research, 10 (Spring 1972), 113–128.Google Scholar
[47]Lakonishok, J., and Vermaelen, T.. “Tax-Induced Trading around Ex-Dividend Days.” Journal of Financial Economics, 16 (07 1986), 287–319.CrossRefGoogle Scholar
[48]Lehvari, D., and Levy, H.. “The Capital Asset Pricing Model and the Investment Horizon.” Review of Economics and Statistics, 59 (02 1977), 92–104.Google Scholar
[49]Martell, T. F., and Wolf, A. S.. “Determinants of Trading Volume in Futures Markets.” Working Paper, Center of the Study of Futures Markets, Columbia Business School (07 1985).Google Scholar
[50]Merrick, J. J. Jr,. “Volume Determination in Stock and Stock Index Futures Markets: An Analysis of Arbitrage and Volatility Effects.” Working Paper, New York Univ. (04 1986).Google Scholar
[51]Morgan, I. G. “Stock Prices and Heteroskedasticity.” Journal of Business, 49 (10 1976), 496–508.CrossRefGoogle Scholar
[52]Morse, D. “Asymmetrical Information in Securities Markets and Trading Volume.” Journal of Financial and Quantitative Analysis, 15 (12 1980), 1129–1148.CrossRefGoogle Scholar
[53]Morse, D. “Price and Trading Volume Reaction Surrounding Earnings Announcements: A Closer Examination.” Journal of Accounting Research, 19 (Autumn 1981), 374–383.CrossRefGoogle Scholar
[54]Osborne, M. F. M. “Brownian Motion in the Stock Market.” Operations Research, 1 (03–04 1959), 145–173.CrossRefGoogle Scholar
[55]Patell, J., and Wolfson, M.. “The Timing of Financial Accounting Disclosures and the Intraday Distribution of Security Price Changes.” Journal of Financial Economics, 13 (06 1984), 223–252.CrossRefGoogle Scholar
[56]Pfleiderer, P. “The Volume of Trade and the Variability of Prices: A Framework for Analysis in Noisy Rational Expectations Equilibria.” Working Paper, Stanford Univ. (05 1984).Google Scholar
[57]Pincus, M. “Information Characteristics of Earnings Announcements and Stock Market Behavior.” Journal of Accounting Research, 21 (Spring 1983), 155–183.Google Scholar
[58]Richardson, G.; Sefcik, S. E.; and Thompson, R.. “A Test of Dividend Irrelevance Using Volume Reaction to a Change in Dividend Policy.” Journal of Financial Economics, 17 (12 1986), 313–333.CrossRefGoogle Scholar
[59]Ro, B. T. “The Disclosure of Replacement Cost Accounting Data and Its Effect on Transaction Volumes.” The Accounting Review, 56 (01 1981), 70–84.Google Scholar
[60]Rogalski, R. J. “The Dependence of Prices and Volume.” The Review of Economics and Statistics, 36 (05 1978), 268–274.CrossRefGoogle Scholar
[61]Rutledge, D. J. S. “Trading Volume and Price Variability: New Evidence on the Price Effects of Speculation.” In Selected Writings on Futures Markets: Research Directions in Commodity Markets, 1970–1980, Peck, A. E., ed. Chicago: Chicago Board of Trade (1984), 237–251.Google Scholar
[62]Schneller, M. I. “Security Price Changes and Transaction Volumes: Comment.” American Economic Review, 68 (09 1978), 696–697.Google Scholar
[63]Smirlock, M., and Starks, L.. “A Transactions Approach to Testing Information Arrival Models.” Working Paper, Washington Univ. (08 1984).Google Scholar
[64]Smirlock, M., and Starks, L.. “A Further Examination of Stock Price Changes and Transactions Volume.” Journal of Financial Research, 8 (Fall 1985), 217–225.CrossRefGoogle Scholar
[65]Tauchen, G., and Pitts, M.. “The Price Variability-Volume Relationship on Speculative Markets.” Econometrica, 51 (03 1983), 485–505.CrossRefGoogle Scholar
[66]Upton, D. E., and Shannon, D. S.. “The Stable Paretian Distribution, Subordinated Stochastic Processes, and Asymptotic Lognormality: An Empirical Investigation.” Journal of Finance, 34 (09 1979), 1031–1039.Google Scholar
[67]Varian, H. R. “Differences on Opinion and the Volume of Trade.” Working Paper, Univ. of MI (02 1986).Google Scholar
[68]Verrecchia, R. E. “On the Relationship between Volume Reaction and Consensus of Investors: Implications for Interpreting Tests of Information Content.” Journal of Accounting Research, 19 (Spring 1981), 271–283.Google Scholar
[69]Westerfield, R. “The Distribution of Common Stock Price Changes: An Application of Transactions Time and Subordinated Stochastic Models.” Journal of Financial and Quantitative Analysis, 12 (12 1977), 743–765.CrossRefGoogle Scholar
[70]Winsen, J. K. “Investor Behavior and Information.” Journal of Financial and Quantitative Analysis, 11 (03 1976), 13–37.CrossRefGoogle Scholar
[71]Wood, R. A.; Mclnish, T. H.; and Ord, J. K.. “An Investigation of Transactions Data for NYSE Stocks.” Journal of Finance, 60 (07 1985), 723–739.CrossRefGoogle Scholar
[72]Ying, C. C. “Stock Market Prices and Volumes of Sales.” Econometrica, 34 (07 1966), 676–686.Google Scholar