Abstract
Relying on the mixture of distribution hypothesis (MDH) and the sequential information arrival hypothesis (SIAH), this paper empirically examines the relationship between stock returns, trading volume and bid-ask spread for 50 Indian stocks using high frequency 5-minute data set for the period July 2, 2012 to December 31, 2012. This is the first study in India using bid-ask spread as yet another measure of information flow variable along with trading volume. Our empirical findings provide evidence of a positive contemporaneous relationship between absolute returns and trading volume as well as between absolute returns and bid-ask spread. The Granger causality test results show that the information content of trading volume and bid-ask spread are useful for predicting stock returns in Indian stock market. Overall results seem to indicate that information arrival to investors tends to follow a sequential rather than simultaneous process as suggested by SIAH. In summary, both trading volume and bid-ask spread serve as a good measure of information variable in India.