AN EXPLORATORY STUDY OF PRICE CHANGES AND TRADING VOLUME RELATIONSHIP IN THE SINGAPORE EQUITY MARKET

Abstract

Unlike security price movement, the distribution of trading volume in financial markets has not received much attention until recently. Studies of trading volume are always associated with security price changes in the forms of price-volume relations in financial markets. Two empirical price-volume relations have been established: (i) trading volume is positively related to absolute price changes in equity and futures markets and (ii) the trading volume and price changes are asymmetric in equity markets (trading volume is greater when prices tick up rather than down). These two relations are distinctively different phenomena both in their empirical treatment and in their theoretical implications. To date, most of the empirical studies were conducted in the United States. Except for a recent study on price-volume relations in the Hong Kong securities market, this area of finance has not been explored in developing capital markets. This Academic Exercise (AE) covers fifteen years from 1975 to 1989 in which the Singapore equity market can be characterised as a developing capital market. The empirical findings here serve to ascertain the validity of these relations in developing capital markets. The empirical results in this AE are consistent with the findings in developed capital markets that there is a positive relationship between trading volume and absolute price changes and that there is an asymmetric relationship between trading volume and price changes. On the theoretical front, there are some interesting findings. Most theoretical explanations propounded in the literature attribute the positive relationship between trading volume and absolute price changes to an external factor, namely information. Through sub-period analysis and investigation of leading and lagged relationship between trading volume and absolute price changes, the empirical findings in this AE are inconsistent with this notion. For asymmetry between trading volume and price changes, this AE hypothesises that this relationship is caused by instantaneous feedback with price changes as the leading factor. To test this hypothesis, this AE investigate leading and lagged relationship between trading volume and price changes per se. The empirical findings in this AE support this hypothesis. To improve understanding on contemporaneous price-volume relations, more should be done on leading and lagged price-volume relations. Future research should be done in this area which has been neglected in the past.