Have You Ever Wondered if Volume and Percent Stock Change Correlate?

I thought about an aspect of the stock market this evening that I thought I'd quickly decipher for myself, and my devoted blog readers. It appears as though every time I look at a stock that has a small volume, there also appears to be equally negligible movement in the stock. As a result, why would anyone want to invest in stocks that have volume of 10,000 or less; it wouldn't make sound sense. However, people invest in stocks regardless of volume. I wondered why nobody really cared about the particular volume of a stock and why this isn't a determining factor when firing off a trade.

By looking at the opening and closing prices of every single stock on the New York Stock Exchange on September 3rd, 2008 (3,243 current listings), I was able to determine the association that volume of a stock has with percentage change.

I had to locate every stock on the New York Stock Exchange for an assignment at school, and obviously with such a surplus of information, I did a lot of cool things with the Excel document that I found. One of them was to determine this correlation.

In order to figure this out, I merely performed the equation for percentage change, (New-Old)/Old. So in our case that would be (Closing Price - Opening Price)/Opening Price. By graphing these two variables on the X and Y axis accordingly, one is able to determine an association between the two variables.

The best association between two variables equals 1.00 after performing a regression analysis that Microsoft Excel takes care of when adding a trend line for a given data set. 1.00 represents that the X and Y coordinates create a perfect line together. On the other hand, a regression analysis of 0 indicates that there is absolutely no association between the variables and is typically seen as a haphazard cloud of points completely in disarray.

Based on this information, we can analyze just how close the relationship is between the two variables.

• Results

As the graph above indicates, based on the data accumulated (courtesy of EOData.com), on September 3rd, 2008 the New York Stock Exchange had a 0.0322 r-squared value describing the association between volume and stock percent change.

This is a tiny number and unbelievably close to 0, which is indicative of little to no association between these two variables. As you can see, the points look like a cloud of information with some random outliers. If the correlation between these two were stronger, one would see the points follow the linear trend line inserted in the graph.

• Conclusion

Although further sample days are probably needed, I think the association between volume and stock percentage change can be put to rest. While I may encounter stocks with low volume having low or no percentage change at all, there is absolutely no rule of thumb for these two variables.

A stock with high volume may have a low percentage change, while the exact opposite of a stock with low volume might have high percentage change. Both statements are unavoidably the case based on empirical research done on September 3rd, 2008 for the New York Stock Exchange.