Journal of Modern Mathematics Frontier

Sept. 2012, Vol. 1 Iss. 3, PP. 1-4

Investment Strategies under Great Trading Volume in Chinese Stock Market

Hua Luo1 , Mingzi Zhu2 , Minglei Wang3
College of Science, Zhejiang Sci-Tech Un iversity, Hang zhou 310018, China 1 luohuahill@163.co m; 2 drops1988@126.co m; 3 laogeisgood@163.co m
Abstract- Based on time series stationary and Granger causality test Model, it is an empirical analysis on the dynamic relationship between stock trading volume and stock price that shows that price-volume relationship is stable in Chinas stock market. And there is a bi-directional relationship between volume and price, that is, volume has a significant guiding on price and vice versa. We study the great volume and stock price volatility, as well as trading strategies. The study shows that a great trading volume can bring investment opportunities which exist mainly when stock price callback and again back on the process of exploration after the great volume generated. Keywords- Price-volume Relationship; Ranger Causality Test; Great Volume; Investment Strategy

As the Chinas stock market experienced share-trading reform, stock price-volu me relat ionship needs further studies on China securities market. A. The Basic Model There are the two models in this part. One is unit root test model, the other is Granger causality test model.

B. Unit Root Test Model

The sequence stability is the premise of a regression analysis and causality test. In this paper, testing the sequence stability of the return and trad ing volu me is tested by the ADF. The model is as follows:

I. INT RODUCTION In recent years, practitioners and academic scholars have found that some relatively simp le trading strategies based on trading volu me and price volatility. In previous research, Bessembinder & Seguin [1-2] (1992, 1993), Karpoff[3] (1987), and Locke & Sayers [4](1993) have concentrated on examining the total volume of trading or extracting an abnormal volu me metric. Jaap van der Hart [5] (2003) thought that combining value, mo mentu m and earn ings revisions indicate into a multivariate strategy to improve the overall performance. Lee and Swaminathan [6] (2000) studied that trading volume or changes in volume reflect fluctuating investor sentiment. Chang Yun Wang and Nam Sang Cheng [7] (2003) have examined the relation between ext reme volumes and expected returns in the Chinas stock market and documented that stocks experiencing extremely high (low) volu mes tend to depreciate (appreciate) over a horizon of as far as 20 weeks. Zhang Bo [8], Li Zhendong [9] concluded that a two-way causal relationship between price and volume. Gong RuKai[10] focused on the volatility to show that a positive relat ionship exists between the change rate of trading volu me and stock price volat ility. In short, the current majo r researches focus on the relationship between volu me and price[11-13], while researches on investment strategies appear less. In addition to the emp irical analysis on the relat ionship between volume and price in Chinas stock market, we try to study the investment strategies from the perspective of the great volume. II. A STUDY ON PRICE-VOLUME RELAT IONSHIP As one of information resources to easily deal, trading volume not only directly reflects the demand and supply situation of the stock market, but also predicts stock price.

Y= Yt 1 + t

Y
j j =1
k j j =1

t j

(1)

Yt = + Yt 1 +

Y
k j j =1

t j

(2)

Yt = + t + Yt 1 +

t j

(3)

Here Y represents the return series or the sequence of trading volume,

Yt = Yt Yt 1 k = 1, 2, 3.

Orig inal

assumption that the sequence Yt contains a unit root, the alternative hypothesis does not contain unit root, that is: = H 0 : 0, H 1 : < 0 .

C. Granger Causality Test Model

Usually to test changes in a variable that causes a variable changes, two variables are tested by Granger causality. The specific model is:

X= Y + ... + Y + X + ... + X
t 1 t 1 k tk 1 t 1

tk

(4) (5)

Y= Y + ... + Y + X + ... + X +
t 1 t 1 k tk 1 t 1

tk

Where k is the maximu m lag order. In (4), the null hypothesis H 0 : 1 = 2 = = k = 0 that Y is not the Granger cause which causes X change. In (5), the null hypothesis H 0 : 1 = 2 = = k = 0 that X is not the Granger cause which causes Y change.

Journal of Modern Mathematics Frontier We can conclude: in Ch ina s stock market, stock prices and stock turnover are mutually Granger causality; we can find some theoretical bases to predict changes fro m volu me change in stock prices. III. THE GREAT VOLUME After a preliminary discussion on price-volu me relationship in Chinas stock market, we try to study from the perspective of the great volu me. The great volu me generally refers to a stock to be exceptionally good or bad, so that the buyer and seller sharp clinch a deal in one day to make a turnover o f the all-day volu me to be more than several times the average turnover in the past few days. This paper is mainly concentrated on the abnormal trad ing volume which will make the late stock price fluctuate and such fluctuations will g ive the stock to bring investment opportunities. A. Stock Selection Model This paper focuses on the great volume of such stock which has the subsequent callback trend. Taking into account these factors, particularly we build the following stock selection model:
V0 1 N

Sept. 2012, Vol. 1 Iss. 3, PP. 1-4

In terms of volatility, we concern whether stock price volatility after the great volu me is greater than volatility before. In order to exclude the confounding factors of the same period in the broader market, we construct the following model:

1 =
2 =

1 N1
1 N1

i =1

N1

P1i P1i 1 P1i 1

P 2 i P 2 i 1 P 2 i 1

(8)

i =1

N1

(9)

1 =
2 =

1 N2
1 N2

i =1

N2

P1i P1i 1 P1i 1

P 2 i P 2 i 1
(11) (10)

i =1

N2

P 2 i 1
1 2 1 2

(12)

Where 1 , 1 respectively, underly ing stock price average of the daily price changes before and after the great volume appears. P1i denotes the underlying stock price before the great volume appears; P 2 i denotes indexs closing price on the i 1 day; P1 denotes the underlying stock price after
i

t =1

Vt

(6) (7)

M ax ( P , P2 Pt ) P0 1
1) Vt denotes trading volume on time turnover, that is
Vt = the number of trading shares on trading day t

t , instead by
.

the great volume appears; P 2 price on the

denotes indexs closing

the number total outstanding shares on trading day t

i day;

N 1 , N 2 denote respectively the reference

P1i is the great volu me o f stock turnover on the day. Selecting turnover is to exclude the impact of different sizes stocks and avoid changes in shares affecting absolute value of the trading volume, so that the choices of the relative indicators make the sequence comparable.
2) N denotes the number of days before the great volume appears. Taking into account the actual situation of Chinas securities market, we chose = N 30, = N 60. 3) P0 denotes closing price of the day when the great volume appears, P , P2 Pt respectively closing stock price 1 of the first trading day , the second trading day, ... the t th trading day after the emergence of the great volu me. In order to study conveniently, we take t = 3 . 4) denotes the mult iples of great volume, here we select it equal to 3. 5) During the study period, if the stock is distributed or allotted, the closing price is corresponding dealt with authority. 6) If the stocks are continuous limit or lower limit, we take volu me and price o f them as a day. B. Volatility Analysis

number of days before and after the great volume appears. Taking into account the actual situation, we take = N 1 30, = N 2 60 . denotes the fluctuation coefficient ratio. > 1 indicates that the great volume has the significant effect on stock price fluctuations, otherwise, not significant. C. Trading Strategies Analysis The great volu me p ro motes the late stock price fluctuate. The regularity of fluctuations in prices will bring some investment opportunities. For trading strategies, we concern that whether the stock price changes will give investors investment opportunities after the great volume produces and what law exists in these opportunities. Based on this, we build the following calculat ion model:

Rij ( k ) =
R( k ) =

Pj ( k ) Pi ( k ) Pi ( k )
ij ( k )

i, j, k N k = 1, 2, 3

(13) (14)

m ax {R }
0i < j m

Here, Pi ( k ) denotes the closing price on the i day of the k stock after the great volume appears; Pj ( k ) denotes the closing price on the j day of the k stock after the

Journal of Modern Mathematics Frontier

Sept. 2012, Vol. 1 Iss. 3, PP. 1-4

great volume produces, Rij ( k ) denotes rate of return of the period fro m the i day to the j day to hold the k stock after the great volu me appears. R denotes the maximu m of
(k )

Rij ( k ) of the k stocks;

m indicates

the maximu m nu mber of

holding days. When (14) holds, we study the distribution characteristics of these five variab les, the corresponding maximu m yield R , the best buy point

* i , the best-selling

time j * , the amp litude R0 i of the best bid stock price Pi to deviate fro m P0 (the corresponding price when the great volume appears), the amp litude R0 j of the best bid stock price Pj to deviate fro m P0 (the corresponding price when the great volu me appears). Here, we let R0 i =
R0 j = Pj Po P0

Fro m the point of view of technical morphology, the stock callback after the great volume generates, there is a secondary return probe to be recognized. Ho wever, as the trading strategy of researchers and practices, we still worry some uncertainty of the trading strategies. Specific performance: (1) the policy may be mo re suitable for short-term or band operation, but not be suitable for investors who insist on buying and long-term; (2) Grasping investment opportunities is still difficult, especially grasping the selling point still needs to be imp roved. So using this investment strategy, investors still need to consider other investment in the underly ing stock fundamentals, other technical indicators, as well as the mentality of investors and other factors. IV. CONCLUSION Based on time series stationary and Granger causality test model, we exp lore the relat ionship between stock trading volume and stock price in Chinas stock market. This study shows that the volume changes to predict future changes of the stock price is a certain basis in Chinas stock market. Fro m the perspective of the great volume to study stock price volat ility and trading strategies, the study shows the great volume will bring about some investment opportunities which exist after stock great volu me produces and the stock price callback and back again to exp lore the process. However, there is at least the fo llo wing deficiencies still need to imp rove. First of all, the perspective of this study is still sufficiently broad; such as the great volume of mu ltip les may be done other adjustments, selecting a different value as different reference. Reference number of days before and after the great volu me appears can be re-made ad justments. Selecting different parameter values may be got better empirical results. This paper is based on actual experience or convenient for the calculat ion to take a fixed value. Second, this paper uses simple statistical methods to deal with data and the method still to be improved.
REFERENCES

Pi Po P0

. Taking into account short-term band operation

of the actual situation in Chinas stock market, we select the maximu m hold ing days after the great volume produces as 60 days. Taking a rough survey in Chinas market, it found that the size of the share capital has a certain impact on the volume changes. The smaller the share capital is, the greater change in the volume will be. It also exists investment opportunities. After the great volu me, the share will rise in price and the rate of return also increases. This result is shown in the table below.
TABLE 1 SHARE CAP ITAL AND THE RATE OF RETURN

Stock 1 2 3 4 5 6 7 8 9 10

Share Capital (10000 Shares) 28,400 88,191 40,960 13,340 8,000 32,000 963,360 22,000 2,129,990 25,001,097

R: the Ratio of the Rate of Turnover 35.5 29.58 38.19 25.53 6.4 14.35 8.31 12.4 7.39 6.10

Rate of Return 0.66 0.65 0.52 0.49 0.48 0.41 0.37 0.33 0.15 0.09

T1
(Day) 32 61 58 36 24 56 31 35 27 27

In R = V1 V2 , V1 denotes the rate of return before trading volume suddenly increases, V2 denotes the rate of return after the great volu me. T1 denotes the number of days of the stock price drop to rise again to the highest point. The main reasons causing investment opportunities are the follo wing. (1) After the emergence of the great volu me, the stock prices call back to make a large influ x of cash. After a little stability in the market, self-help is needed. (2)

[1] Bessembinder, H., & Seguin, P. J. (1992). Futures trading activity and stock price volatility. Journal of Finance, 47, 20152034. [2] Bessembinder, H., & Seguin, P. J. (1993). Price volatility, trading volume and market depth: Evidence from futures markets. Journal of Financial and Quantitative Analysis, 28, 2139. [3] Locke, P. R., & Sayers, C. L. (1993). Intraday futures price volatility: Information effects and variance persistence. Journal of Applied Econometrics, 8, 15 30. [4] Karpoff, J. M . (1987). The relation between price changes and trading volume. Journal of Financial and Quantitative Analysis, 22, 109 126. [5] Jaap van der Hart, Erica Slagter, Dick van Dijk. Stock selection strategies in emerging markets. Journal of Empirical Finance 10 (2003) 105 132. [6] Chang Yun Wang, Nam Sang Cheng. Extreme volumes and expected stock returns: Evidence from Chinas stock market. Pacific-Basin Finance Journal 12 (2004) 577 597. [7] Lee, C., Swaminathan, B., (2000). Price momentum and trading volume. Journal of Finance 55, 20172070.

Journal of Modern Mathematics Frontier

[8] Li Bo. An Empirical study on shanghai securities a-share market price. Research on Financial an d Economic Issues Number 2 (General Serial No. 291) February. 2008. [9] Li Zhengdong, Fan Xinying. Empirical study on the dynamic relation between price and trading volume in shanghai stock market with the V AR M odel. Journal of Lanzhou Commercial College. V ol. 23, No. 4. Aug. 2007. [10] Gong Rukai. An Empirical study on the ARCH effect in China's stock market. Finance and Economy 12, 2008. [11] Temporal variations of serial correlations of trading volume in the US stock market. Physica A , 391 (2012), 41284135.

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[12] Trading V olume Around Earnings Announcements and Other Financial Reports: Theory, Research Design, Empirical Evidence, and Directions for Future Research. Contemporary Accounting Research, V olume 28, Issue 2, June 2011 431471. [13] The Relationship between V olatility and Trading V olume in the Chinese Stock M arket: A V olatility Decomposition Perspective. Annals of Ecomomics and Finance 13-1, (2012) 211236.