Time and Dynamic Volume-Volatility Relation

Publication Type

Journal Article

Publication Date

2006

Abstract

This paper examines volume and volatility dynamics by accounting for market activity measured by the time duration between two consecutive transactions. A time-consistent vector autoregressive (VAR) model is employed to test the dynamic relationship between return volatility and trades using intraday irregularly spaced transaction data. The model is used to identify the informed and uninformed components of return volatility and to estimate the speed of price adjustment to new information. It is found that volatility and volume are persistent and highly correlated with past volatility and volume. The time duration between trades has a negative effect on the volatility response to trades and correlation between trades. Consistent with microstructure theory, shorter time duration between trades implies higher probability of news arrival and higher volatility. Furthermore, bid-ask spreads are serially dependent and strongly affected by the informed trading and inventory costs.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Banking and Finance

Volume

30

Issue

5

First Page

1535

Last Page

1558

ISSN

0378-4266

Identifier

10.1016/j.jbankfin.2005.05.011

Publisher

Elsevier

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