A review on the relationship between stock prices and trading volumes

This review article reflects the studies in the area of stock prices and trading volume in a national and international context. In addition, this review has given the emphasis on the relationship between different dimensions of stock prices and trading volume. The review of several studies has revealed that there is no unanimity about the relationship between trading volume and stock prices. EMH developed by Fama (1960) argued the causality of volume on price is not possible in the efficient market framework. In an inefficient market framework, both stock prices and trading volume change with the arrival of new information. As the arrival of new information is not observed, the trading volume is the source of information to investors. Some theoretical studies have opined that there exists a positive contemporaneous and causal relationship between price volatility and trading volume. Thus, higher price volatility leads to higher trading volume. Some other studies have viewed that lagged trading volume has predictive power of future stock price and lagged stock price has predictive power of future trading volume. Similarly, the review of some studies has shown a bidirectional causal relationship between trading volume and stock returns and some other studies have shown unidirectional causality either from trading volume to stock price or stock price to trading volume. Most of the empirical studies have found that there is a positive and causal relationship between trading volume and stock prices. Since a small number of studies have been performed in this area in the Nepalese context, it is still difficult to confirm the relationship between trading volume and stock prices in the Nepalese financial market. However, some studies conducted in Nepalese financial markets have also revealed a positive relationship between these two variables.