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The Endogeneity of Trading Volume in Stock and Bond Returns: An Instrumental Variable Approach
Author(s) -
Yamani Ehab,
Rakowski David
Publication year - 2019
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12182
Subject(s) - endogeneity , economics , econometrics , instrumental variable , stock (firearms) , financial economics , volume (thermodynamics) , bond , monetary economics , finance , mechanical engineering , physics , quantum mechanics , engineering
This paper investigates the joint determination of trading volume and returns. Our approach follows from the argument that trading activity depends on security returns, thus resulting in a reverse causality from returns to trading activity. Using exogenous instruments for security trading activity, we estimate a system of two‐stage simultaneous equations to better model the return‐volume relationship. Our results confirm that returns and trading volume are determined simultaneously in both stock and corporate bond markets and that conclusions about the direction and significance of causality between volume and returns can be reversed once one corrects for the endogeneity of volume.