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A new interpretation of known facts: The case of two-way causality between trading and volatility

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  • Müller, Christian

Abstract

Efficient price setting implies that news create volatility since traders flock to the market in order to re-optimise their portfolios. In due course of the price finding process volatility should decline once the asset price approaches its new, efficient level. In this note I present evidence that the reverse mechanism plays as well. Traders genuinely increase volatility challenging the presumption that more traders help to identify the efficient price more quickly.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 3 ()
Pages: 664-670

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:664-670

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Rational expectations; Uncertainty; Causality; Very high frequency data;

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