Chicken-Egg Dilemma for the Relationship Between Price and Volume in Borsa Istanbul

Chicken-Egg Dilemma for the Relationship Between Price and Volume in Borsa Istanbul

Sadullah Çelik (Marmara University, Turkey) and Ayben Koy (Istanbul Commerce University, Turkey)
Copyright: © 2019 |Pages: 24
DOI: 10.4018/978-1-5225-7399-9.ch003

Abstract

This chapter empirically examines the relationship between stock prices and stock volumes for Borsa Istanbul, the only stock exchange in Turkey. The price-volume debate has been a common focus in the literature as the chicken-egg dilemma probably since the financial markets started to operate in a competitive manner. This chapter employs Borsa Istanbul and also considers the sector indices of the market. The authors employ frequency domain causality analysis of Breitung and Candelon and wavelet coherence analysis of Grinsted et al. with comparisons of the results for each sector. The findings show that (1) it is hard to argue for the existence of a distinct pattern in an emerging stock market like Borsa Istanbul; (2) there are several periods that propose challenges like the increasing foreign share, foreign shocks transmitted to the domestic market, and local effects; and (3) speculation is an inherit part of stock markets; and it is not possible to get rid of but rather act timely to minimize the adverse consequences and to deter market-wide repercussions.
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Theory: Efficient Markets

According to the efficient markets (EM) theory, securities prices fully reflect all available information. While it is impossible to obtain an economic profit with the current information-based transactions, the market is efficient. In an ideal market, prices give the right signals for resource allocation so firms can make production-investment decisions while investors are making investment decisions on the assumption that market prices always reflect “full knowledge” (Fama, 1970). The basic assumptions of EM are “the lack of information costs” and “the lack of transaction costs”. However, new approaches to the market activity hypothesis have been developed in the real world because of the existence of the transaction costs. In an efficient market, a large number of investors have obtained information on securities at low cost; the transaction expenses are low, the liquidity is high. Thus, economic, social and political changes are spread rapidly in the market and reflected in the prices of the securities which change in an independent and random manner.

The initial definitions of EM are based on the random walk model. This model argues that any asset price cannot be estimated with the past price information. All of the available information in the market has been reflected in the price, and the existing price in the market is the real price. The efficiency have been tested empirically in three forms, as “Weak Form Efficiency”, “Semi-Strong Form Efficiency” and “Strong Form Efficiency” (Fama, 1970).

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