Hedging or Speculation, What Can We Learn from the Volume-Return Relationship?

This study investigates the volume-return relationship using data from the Chinese stock market. Based on the model set up by Llorente et al. (2002), we test empirically whether investors in China are hedging oriented or motivated by speculation. A two-state Markov switching model was used to augment the basic model. Allowing the underlying model to switch between two regimes reveals further information that investors' motivation in the Chinese stock market is sensitive to the general market conditions