New insights on the trading volume-return relationship : evidence from the three largest stock exchanges

This chapter uncovers new insights on the dynamic volume–return relationship. We verify whether non-informational or informational trading can explain the volume-return relation in the three largest stock exchanges. We apply the cross-quantilogram approach to investigate the directional predictability from volume to returns across different market states. Besides, we consider nonlinearities and asymmetries in the volume-return relationship. We report evidence that the volume-return relationship is asymmetric and nonlinear across different market phases. Our results are consistent with models based on asymmetric information and overreaction to news among investors, where prevalent informational (non-informational) trading leads to negative (positive) volume-return causality. Our findings have important policy implications for risk managers, who may use the predictability from past volume to future returns for developing optimal hedging strategies.