Price-Volume Correlations Are Always Zero
Victor Olkhov
Abstract
We argue that the use of the empirical time series of values, volumes, and prices of consecutive trades made during the averaging interval to calculate the price-volume correlation in a way that follows the definition of correlation always gives zero correlation. We show that the usual expression for the empirical calculation of the correlation misleads the researchers and doesn't fulfill the definition of price-volume correlation. The mistake has its origin in the dependence of volume weighted average price on the mean values and volumes of trades during the averaging interval but not on time series of prices only. The true sense of the declared positive or negative results of the empirical calculations of price-volume correlations made by numerous researchers in reality is determined by the difference between the volume weighted average price and its limiting expression of average price, which is correct only when all volumes of consecutive trades are constant, and multiplication of this difference by the mean trade volume. To empirically determine the statistical dependence between time series of prices and trade volumes, one should calculate the correlations between prices and squares of trade volumes or correlations between squares of prices and squares of volumes. We derive the expressions for empirical calculations of these correlations.
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