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Primary Discipline

Social Sciences


Knowledge of the relationship between trading volume and trading equities enhances investors and public policy maker’s knowledge of market structure. In this paper, we examine the effects of trading volume on stock prices using a panel of stock prices from the S&P 500 Index. We develop an ordinary least squares regression model, implementing control variables, fixed effects and an instrumental variable to minimize statistical bias. We find evidence that an increase of trading volume by its mean is associated with a $2.42 increase in average stock price. We also find stronger evidence that an increase of trading volume by its average initiates stock returns of 3.20%. Our results suggest trading volume can be a cause of higher stock prices, allowing for arbitrage opportunities in the market and disputing the efficient market hypothesis.