Stock prices and trading volume: An assessment for linear and nonlinear Granger causality

Unidirectional linear Granger causality from stock returns to trading volume is observed for the entire sample period and for both the sub-periods as well. The null hypothesis of linear Granger noncausality from percentage volume changes to stock returns is rejected only in optimal lag length for the second sub-period. Regarding nonlinear Granger causality, the modified Baek and Brock's test [Baek, E., & Brock, W. (1992a). A general test for nonlinear Granger causality: Bivariate model. Working paper, Lowa State University and University of Wisconsin, Madison] for nonlinear Granger causality provides evidence of significant unidirectional nonlinear Granger causality from percentage volume changes to stock returns in both the sub-periods for all the common lag lengths used but not for vice versa. Finally, the analysis suggests that the linear Granger causality from volume change to stock price change depends on the direction of the stock price movement. The investigation exposed that volume has significant nonlinear explanatory power for stock returns in general, whereas stock returns have linear explanatory power for trading volume.