Trading volume and stock market volatility in GCC economies: A Perspective from the MS-VAR Model

Abstract

This study employs the Multivariate Stochastic Volatility Vector Autoregressive (MS-VAR) model to investigate the intricate relationship between trading volume and market volatility in the Gulf Cooperation Council (GCC) stock markets. These markets, characterized by their shared economic ties, geopolitical dynamics, and harmonized regulatory frameworks, present a unique setting for analysis. Utilizing a comprehensive dataset spanning from January 1, 2010, to October 1, 2023, the research explores the dynamic interactions between trading volume and market volatility, revealing both multifaceted relationships and asymmetric dynamics with investment returns. While the influence of trading volume on volatility and returns may appear limited, the effects of market volatility and returns on trading volume are notably robust. These findings have significant implications for market participants, policymakers, and investors in the GCC region, offering insights to refine trading strategies, enhance risk management practices, and guide portfolio diversification decisions while contributing to the broader academic understanding of emerging markets with a shared regional identity and distinct economic factors.