Linear and Non-Linear Dependence between Returns and Trading Volume in the Currency Futures Market
University of Wales, Bangor Research Papers No. RP 98/21
Posted: 26 Feb 2007
Abstract
In this paper, the relationship between returns and trading volume is examined for four futures contracts for the period January 1, 1986 to April 30, 1997. Both linear and nonlinear dependence are examined. The study first employs linear causality tests and find that futures returns and volume have no predictive power for one another. However, since the series show evidence of nonlinear dependence, the GARCH model is then employed. The results show a sifnificant relationship between the returns and volume for only two of the four currencies (i.e Japanese yen and Swiss franc) tested. Moveover, when the series are divided into subsamples, the results of the GARCH tests point to a significant relationship for all currency futures regarding the prediction of returns from volume traded, although mainly in the second period. The results of this study suggest that trading volume can provide importat information in return prediction using a nonlinear model but that the series do not exihibit homogenous behaviour over the entire sample period. Further, the results support the sequential information arrival hypothesis ounly in few cases.
Keywords: G13, G14
JEL Classification: Linear, nonlinear, trading volume, returns
Suggested Citation: Suggested Citation