This paper reconsiders the relationship between stock return volatility and trading
volume. Based on the multi-factor stochastic volatility model for stock return, we
suggest several specifications for the trading volume. This approach enables the
unobservable information arrival to follow the ARMA process. We apply the model to
the data of Philippine Stock Exchange Composite Index and find that two factors are
adequate to describe the movements of stock return volatility and variance of trading
volume. We also find that the weights for the factors of the return and volume models
are different from each other. The empirical results show (i) a negative correlation
between stock return volatility and variance of trading volume, and (ii) a lack of effect
of information arrivals on the level of trading volume. These findings are contrary to the
results for the equity markets of advanced countries.
