The Stock Return-volume Relation and Policy Effects: The Case of the Chinese Energy Sector

This paper examines the relation between trading volume and stock returns for two Chinese A-share markets and ten individual stocks in the energy sector. We also investigate the effects of exogenous government policies on the relation between trading volume and stock return. Using daily data covering the period from January 1, 1997 to December 31, 2002, we find the relationship between trading volume and return is asymmetrically V-shaped with the response of trading volume to a rising return being stronger than that to a falling return. Granger causality tests demonstrate stronger evidence of return causing volume; volume has only a weak effect on future returns but a strong and predictable effect on absolute returns. We investigate the effects of changes to general stock market regulations as well as energy-specific policy changes on the return-volume relationship. We find that the sector-specific changes generally change the intercept of the return-volume relationship but not its slope. Changes in general market regulations affect both intercept and slope coefficients, suggesting that government policies have a significant impact on overall stock prices as well as energy returns although the nature of the effect depends on whether the policy shock is sector-specific or general to the market as a whole.