The purpose of this study is to investigate relationship between price changes and volume in stock index futures and stock market. The data set used in this study consists of daily the nearest futures price and trading volume, daily KOSPI 200 index and aggregate volume, 5 portfolios stratified on average won volume.
We examine contemporaneous and dynamic relationship between price changes and volume. For the contemporaneous relationship, we use correlation coefficient and Wilcoxon rank sum and Kolmogorov-Smirnov test. Also, we use linear and nonlinear causality test for the dynamic relationship between price changes and volume. Major findings of this study are as follows.
First, there exists a positive correlation between price changes and volume in stock market, where the cost of taking long and short positions are asymmetric. On the contrary, we find the absence of a positive correlation between price changes and volume in stock index futures market, where transaction costs are symmetric. This result can be interpreted as an direct evidence suggesting that costly short sales restrict investors from acting on their information when the effect is to decrease their demands.
Second, we find no evidence of significant bidirectional linear causality. But we find evidence of significant bidirectional nonlinear causality between price changes and volume in stock index futures market and stock market.
