Stock Price Trading Value Article Critique

Pages: 8 (2535 words)  ·  Bibliography Sources: 1+  ·  Level: Master's  ·  Topic: Economics

SAMPLE EXCERPT:

[. . .] The Eastern European economies are also dependent on following the recommendations of the IMF that imposes restrictions on government support programs for these countries. Turkey is an example of an economy that has emerged successfully into economic success through the programs of the World Bank and IMF. These programs have required countries in the region to refrain from stimulus packages in order to boost economic growth. In this scenario, this study may prove helpful to economists in the region for determining ways in which the stock market can be made a driver of economic growth. The results of this study can be used by the individual countries to tailor their information flow mechanisms and improve stock trade regulations to enable investors to read stock market signals in time and make the correct investments to help the region grow into a mature financial market.

Comparison with other Studies

Brailsford (1994, p. 11) has conducted a study on the relationship between stock price and volume in Australia. Like Gunduz and Hatemi-J (2005), his study has also discussed the role of information in mediating the relationship between stock price and volume. Brailsford goes a step further to explain that information effects result in the stock price data not being normally distributed. This happens because current information based on past information results in a bigger change in volume than the previous change in volume. Brailsford also concludes that a significant relationship between stock price and volume (p. 28).

Sabri (2008, p. 9) has also researched on the topic of the relationship between stock price and volume of trade. In particular, he has focused on the degree of cointegration between stock price and volume of trade in the Arab stock markets. He concludes that a strong relationship exists between the stock price and the volume of trade. Changes in stock price can and do bring about changes in the volume of trade. He further explains that the volatility of the stock price cannot be explained as a spillover effect of other international stock markets, since Arab stock markets are not closely integrated with internationals stock markets. Sabri (2008, p. 9) discovered that the volatility and strength of correlation was greatest in the oil-producing Arab countries, leading him to explain the volatility as a response to volatile changes in the price of oil in the international markets.

Leon (2007, p. 182) also discusses the relationship between volume and stock return volatility and arrives at a similar conclusion as Gunduz and Hatemi-J (2005). Leon's research conducted in the regional stock market of West Africa, known as Bourse Regionale des Valeurs Mobilieres (BVRM) verifies Copeland's (1976) prediction that volume changes carry an informational content which can shape investors' perceptions and affect the stock price. He also concluded that the West African stock market is information-inefficient, which is similar to the findings of Gunduz and Hatemi-J (2005) in the Central and Eastern European markets.

Similar findings are also observed by Tripathy (2011) in her study on the relationship between volume and stock price in Indian stock markets. She also uses the Johansen cointegration test used by Gunduz and Hatemi-J (2005) in their study. She also finds a bidirectional causality between the trade volume and stock return volatility, which leads her to conclude as well that stock price changes carry informational value for investors (2011, p. 88).

Deo et al. (2008) also conducted a similar study on the relationship between trading volume and stock price volatility in selected Asia-Pacific stock market. They also used the Granger procedure to identify the sequential causation between volume and price. They discovered a bidirectional relationship reflecting that changes in price influence changes in volume and vice versa. They also conclude that price as well as volume changes carry informational value for investors, which explains the lagged effect.

Like the conclusion of Gunduz and Hatemi-J (2005) on the Turkish and Russian stock markets, the study of Pathirawasam (2011) on the relationship between volume and price in the Colombo stock exchange also explains a weak-form efficiency in the Colombo stock market. This shows that all the information of past volume changes can be reflected in the current price changes (p. 47).

The studies of Gunduz & Hatemi-J (2005) and other researchers mostly show that a bidirectional relationship exists between stock price and volume. Their studies are conducted in the emerging and frontier stock markets, which can account for the bidirectional relationship. In all the studies, there exists cointegration between stock price and volume and all studies prove a significant long-term correlation between stock price and volume. The only exception to this cointegration is in the case of the Czech Republic where a significant cointegration was not found and the null hypothesis was accepted.

On the basis of the findings of the above studies, it is recommended that the stock market regulators in emerging economies should ensure smooth information flow channels so that investors have access to information that is of interest to them. mechanisms should be in place that allow information about past and contemporaneous changes in price and volume to be accessible to all investors simultaneously. Although private sources of information may exist, making information symmetry difficult to achieve, the efficiency of markets can be increased if public information channels are also improved.

References

Brailsford, T.J., 1994. The Empirical Relationship between Trading Volume, Returns and Volatility, pp. 1-33.

Deo, M., Srinivasan, K. And Devanadhen, K., 2008. The Empirical Relationship between Stock Returns, Trading Volume and Volatility: Evidence from Select Asia-Pacific Stock Market. European Journal of Economics, Finance and Administrative Sciences, 12, pp.41-49.

Gunduz, L. And Hatemi-J, A., 2005. Stock Price and Volume Relation in Emerging Markets. Emerging Markets Finance and Trade, 41 (1), pp.29-44.

Leon, N.K., 2007. An Empirical Study of the Relation between Stock Return Volatility and Trading Volume in the BRVM. African Journal of Business Management, 1 (7), pp.176-184.

Pathirawasam, C., 2011. The Relationship between Trading Volume and Stock Returns. Journal of Competitiveness, 3, pp.41-49.

Sabri, N.R., 2008. The Impact of Trading Volume on Stock Price Volatility in the Arab Economy, [online] pp.1-11. Accessed on… [END OF PREVIEW]

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Stock Price Trading Value.  (2012, May 30).  Retrieved December 10, 2018, from https://www.essaytown.com/subjects/paper/stock-price-trading-value/5270875

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"Stock Price Trading Value."  Essaytown.com.  May 30, 2012.  Accessed December 10, 2018.
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