Analysis of the relationship between the volume of trading and the price of equities as exhibited on the New York Stock Exchange

Abstract

Scope and Method of Study: This report is an analysis of the purported relationship between the volume of trading and the price of equities as observed on the New York Stock Exchange. Technical analysts have generally considered that volume of trading for an individual stock, as exhibited in a generally rising or "bullish" market, is an indication of the future price movements of that stock. It is the purpose of this report to make an objective and thorough investigation of the possible relationship between volume and price in the stock market at the individual security level.

In order to accomplish this project, weekly price and volume data were collected on some fifty randomly selected stocks from Standard and Poor's 500 composite index over a five-year period (1963 through 1967). These observations were then subjected to correlation analysis under various statistical transformations and time period relationships.

Findings and Conclusions: The results, although mixed, do provide definite insights into the problem at hand. A general, widely applicable relationship does not appear to exist in a normally rising market. However, in regards to those stocks which were volatile in nature, whose price fluctuated greatly at varying levels of trading volume, a higher degree of correlation does appear to be in evidence. Thus, although volume of trading cannot be used as a general indicator or predictor of prices, it can possibly be used as a profitable means of forecasting price under tightly specified and limited conditions.