| The purpose of research on price-volume relation in stock market is to demonstrate that because volume can affect price and price has a feedback effect on it, volume can provide useful information about the value of risk asset to traders in the market. Therefore, it is necessary to answer three fundamental questions for the task. First, is there a stable price-volume relation? Second, can volume provide additional information that cannot be inferred from price? And third, is what volume shows useful and is it a noise? Among these fundamental questions, the latter is based on the former. Then they form the analysis frame of this paper. Before the research begins, we should know there are at least five reasons the price-volume relation is important. First, it provides insight into the information structure of financial markets. Second, it is important for event studies that use a combination of price and volume data from which to draw inferences. Third, it is critical to the debate over the empirical distribution of speculative prices. Fourth, it forms the theoretic base of technical analysis. And last, it has several significant implications for research into futures prices.Our research follows the logic procedure from empirical analysis to theoretic modeling, and adopts such analysis tools as statistical tests, econometrical methods and mathematical economics modeling. In the first part, this paper reviews previous foreign research on the relation between price changes and trading volume in financial markets and take the mature conclusion as the objects of the following empirical tests. Then in the second part, it carries on the tests with the data of daily comprehensive index's close price and volume of June 1994 to September 2001 sampled from Shanghai Security Exchange, which involves linear regression, linear and nonlinear Granger causality tests. In the third part, a theoreticalexplanation of price-volume relation is given by mathematical economics.The main conclusions of this paper are displayed through answering the three fundamental questions.I. This paper gives a positive answer to Question 1 from the empirical and theoretic viewpoints, which concludes that the relation is stable between price change and volume. In our empirical analysis all tests get statistically significant results but they are not identical in detail.II. For Question 2, the answer will differ under different conditions. Theoretically, price change and volume both reflect all information contained in market, so any additional information cannot be drawn from volume. But this is up to the assumption that price change and volume are observed only at the end of the trade period. If new information comes into the market continuously, price change and volume have different content of information. As the reason of that the market is always changing and in the process tending to equilibrium, volume is a volatile flow. The current volume can provide certain information that will be reflected by price in the future, especially in the weak-form efficient market. Exactly this is the reason why in empirical work there is remarkable price-volume relation in statistics. So from this point, volume does provide more information than the price at the same time.III. The answer of Question 3 is that the information provided by volume can affect equilibrium price, so it is valuable to traders in the market. In empirical analysis, the result of linear Granger Causality test shows that volume is obviously helpful to prediction of price change, and in theoretical explanation, the information contained in volume is also held by equilibrium price. So the information represented by volume is useful to traders' adjustment of expectation of equilibrium price.IV. From the point of view of domestic researchers, price-volume relation of individual stock appears more often a bi-directional causality resulted from empirical analysis with linear method. While in this paperthe relation of market is displayed as a bi-direction but asym... |
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