Examining drivers of trading volume in European markets

Abstract

This study presents an in-depth exploration of market dynamics and analyses potential drivers of trading volume. The study considers established facts from the literature, such as calendar anomalies, the correlation between volume and price change, and this relation's asymmetry, while proposing a variety of time series models. The results identified some key volume predictors, such as the lagged time series volume data and historical price indicators (e.g. intraday range, intraday return, and overnight return). Moreover, the study provides empirical evidence for the price-volume relation asymmetry, finding an overall price asymmetry in over 70% of the analysed stocks, which is observed in the form of a moderate overnight asymmetry and a more salient intraday asymmetry. We conclude that volatility features, more recent data, and day-of-the-week features, with a notable negative effect on Mondays and Fridays, improve the volume prediction model. | INTRODUCTIONThis study investigates the drivers affecting the trading volume with an in-sample analysis. We explore the interaction between truly exogenous determinants and trading volume. Several hypotheses are evaluated while looking at the previous literature, where various factors are discussed in isolation, and we propose a liquidity extraction model by placing these findings in a unified context.Identifying the drivers of trading volume is crucial in order to anticipate and minimize market impact, by accurately sizing and executing orders. Achieving optimal order sizing relies on precise volume prediction, that is, planning trades and deciding how much to trade given the current market context and the predicted volume levels. To better illustrate the importance of trading volume, some recent facts include the total turnover value, which was $63tn in 2011 (World Federation of Exchanges, 2012) and $49tn in 2012 (World Federation of Exchanges, 2013. The NYSE's turnover averaged more than 100% between 2004 and 2009, with 138% in 2008(NYSE Euronext, 2016, meaning that the entire market value has changed hands once a year, although it has decreased to significantly lower levels during the following years, averaging 72% for the 2010-2015 period.In order to better understand the factors affecting the trading volume, it is necessary to survey and combine apparently disjoint literature concepts. We start by reviewing the relevant areas of the behavioural finance literature. Here, a large amount of research has mainly investigated the calendar effects on price returns, and there is very little emphasis on the calendar effects on trading volume. We particularly focus on the day-of-theweek effect, which, once investigated, can formulate ------------------------------------------------------------------This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

To Study the Reaction of the Investors in Trading Behaviour in Bursa Malaysia Based on KLSE Market Index Performance

“…It is hypothesized in the current study that investors will become more risk-averse and cut back on their stock market trading activity if the market has recently seen poor performance. This theory is in line with previous research on investors' reactions to market shifts (Batrinca, Hesse & Treleaven, 2018). This would mean that investors' decisions about whether or not to put money into the stock market would be driven by the ups and downs of the market index and the performance of individual stocks.…”

“…This proved that investors' faith in the stock market was being impacted by the state of the economy. Because of the belief that a recession will lead to a drop in stock market performance, investor sentiment and behavior tend to adopt a more cautious tack during this time (Batrinca, Hesse & Treleaven, 2018). Due to the high level of uncertainty, which can result in a high level of exposure to potential loss, investors are typically advised to decrease their desire to invest in the stock market.…”

Liquidity, time‐varying betas and anomalies: Is the high trading activity enhancing the validity of the CAPM in the UK equity market?

“…Given the strong seasonal behaviour of the liquidity premium (Batrinca, Hesse, & Treleaven, 2018;Eleswarapu & Reinganum, 1993), we adapt the approach followed by Jagannathan and Wang (2007) and switch our final series to an annual basis.…”

Monday mornings: Individual investor trading on days of the week and times within a day

“…Such research has proposed a day of the week effect (Monday effect), where market returns are poorer on Mondays (French, 1980). There is mixed evidence of a universal day of the week effect (Dicle & Levendis, 2014) but there is evidence that markets have less trading activity on Mondays compared to other days of the week (Batrinca et al, 2018;Foster & Viswanathan, 1993). Our findings show that individual investors follow a different trend; they are more likely to trade on a Monday and they are more likely to sell on a Monday than any other day of the week.…”

“…Secondly, Batrinca, Hesse, and Treleaven (2018) conducted an analysis on pan-European stock markets which comprised of 7,197,065 daily observations for the period between 1 January 2000 and 10 May 2015. They found that the trading volume on Monday was less than other days of the week.…”