The Relation Between Trading Volume and Return Volatility: Evidence from Borsa Istanbul

This study investigates the relationship between volume and volatility in the context of the Mixture of Distribution Hypothesis (MDH) and Sequential Information Arrival Hypothesis (SIAH) with respect to company size in Borsa Istanbul (BIST). Employing the generalized method of moments (GMM) method and granger causality tests, we find statistical evidence supporting the MDH for large-cap stocks, whereas we document no evidence of contemporaneous interaction between volume and volatility for mid-cap and small-cap stocks. This suggests that the dissemination of information in the stock market appears to be primarily through large firms. Our findings for large cap stocks have not changed across economic states. In terms of SIAH, for the stocks of companies of any size, we document uni-directional causality running from volatility to volume but not the other way around which is not consistent with the SIAH. However, we find supporting evidence of the SIAH for large cap stocks during the expansion periods.