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Can Speculative Trading Explain the Volume-Volatility Relation?

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Author Info
Foster, F Douglas
Viswanathan, S

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Abstract

The authors derive a speculative trading model with endogenous informed trading that yields a conditionally heteroskedastic time series for trading volume and the squared price changes. They use half-hourly price change and volume data for IBM during 1988 to test the model and estimate the structural parameters using the simulated method of moments estimation procedure. While the model seems to do a reasonable job fitting the unconditional moments of the volume and the squared priced change processes, it fares less well in fitting the relation between current trading volume and lags of trading volume; and squared volume's (and its lag) relation to squared price changes.

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Publisher Info
Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 13 (1995)
Issue (Month): 4 (October)
Pages: 379-96
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Handle: RePEc:bes:jnlbes:v:13:y:1995:i:4:p:379-96

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  1. Joel Hasbrouck & Duane J. Seppi, 1998. "Common Factors in Prices, Order Flows and Liquidity," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-011, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  2. Joel Hasbrouck, 1999. "Trading Fast and Slow: Security Market Events in Real Time," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-012, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  3. Yacine Ait-Sahalia, 1996. "Dynamic Equilibrium and Volatility in Financial Asset Markets," NBER Working Papers 5479, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Fabrice Collard & Patrick Fève & François Langot & Corinne Perraudin, 2002. "A structural model of US aggregate job flows," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(3), pages 197-223. [Downloadable!]
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  5. Dominique Dupont, 1997. "Trading volume and information distribution in a market-clearing framework," Finance and Economics Discussion Series 1997-41, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  6. Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Chang, Yoosoon & Miller, J. Isaac & Park, Joon Y., 2005. "Extracting a Common Stochastic Trend: Theories with Some Applications," Working Papers 2005-06, Rice University, Department of Economics. [Downloadable!]
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  8. Nevin Yörük & Cumhur Erdem & Meziyet Sema Erdem, 2006. "Testing for linear and nonlinear Granger Causality in the stock price--volume relation: Turkish banking firms’ evidence," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(3), pages 165-171, May. [Downloadable!] (restricted)
  9. Francisco Peñaranda & Jón Daníelsson, 2007. "On the Impact of Fundamentals, Liquidity and Coordination on Market Stability," Economics Working Papers 1003, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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