An examination into the impact of trading motives on the dynamic relationship between stock returns and trading volume: evidence from Egypt

Marwan Mohamed Abdeldayem¹* and Mohamed Reda Mahmoud²

^1,2Business Administration Department, Finance Section- Faculty of Commerce-Cairo

University-Egypt

¹Cairo University, Faculty of Commerce, Business Administration Department-Giza-Egypt- P.O Box: 12613

*Corresponding Author’s E-mail: Marawan2000@hotmail.com

Accepted 10 April 2013

Abstract

Numerous studies have examined the return correlation among different markets and the relationship between stock returns and trading volume. However, the impact of trading motives on the dynamic relationship between stock returns and trading volume especially in emerging markets is still vague and fragmented. Therefore, this study aims to examine the impact of trading motives on the dynamic relationship between stock returns and trading volume in Egypt by using the daily data of all listed 167 stocks traded in the Egyptian Exchange (EGX) for a period of 6 years, from January 2006 till December 2011. We used the model of Liorenate, Michaely, Saar and Wang (2002) {LMSW model} that utilizes information in volume return dynamics of individual stocks and show that bid-ask spread - which is used as asymmetric information proxy- can explain the extent of speculative trade across firms traded in the Egyptian Exchange. We found evidence supporting the notion that speculative trade is dominant in emerging markets and is also associated with positive serial autocorrelation in stock returns.

Keywords: Stock Returns, Trading Volume, Trading Motives, Egyptian Exchange (EGX), Serial autocorrelation, Asymmetric information, Hedging, Speculation