Analyzing the nexus of stock return dynamics, trading volume and volatility in the Indian Stock Exchange

Purpose This study aims to analyze the complex link among stock return dynamics, trading activity and market fluctuations in the Indian Stock Exchange, encompassing both the Bombay Stock Exchange and the National Stock Exchange. It seeks to offer important perspectives for investors, policymakers and researchers on the interactions of these variables within one of the largest emerging financial markets globally. Design/methodology/approach A comprehensive collection of daily stock prices, trading volumes and volatility indices from April 2013 to March 2023 was utilized. Advanced econometric techniques, including the Granger Causality (GC) test and the autoregressive distributed lag (ARDL) bounds test, were employed to examine both immediate and enduring connections among stock returns, trading volume and volatility. Findings The ARDL bounds test demonstrates a long-term linkage among trading volume, volatility and stock returns. The GC test identifies bidirectional causality between volatility and trading activity, as well as the relationship between volatility and stock performance. These results reveal how stock returns are influenced by market activity and volatility, offering crucial insights into the dynamics of the Indian stock market. Originality/value The results offer practical guidance for investors, financial analysts and policymakers. Understanding these dynamics can help mitigate risks in volatile market conditions and guide the creation of more effective investment strategies. Policymakers can use these insights to enhance regulatory frameworks and improve market transparency.