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A state-space modeling of the information content of trading volume

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  • Rzayev, Khaladdin
  • Ibikunle, Gbenga

Abstract

We propose a state-space modeling approach for decomposing trading volume into its liquidity-driven and information-driven components. Using a set of high-frequency S&P 500 stock data, we show that informed trading is linked with a reduction in volatility, illiquidity, and toxicity/adverse selection. We observe that our estimated informed trading component of volume is a statistically significant predictor of one-second stock returns; however, it is not a significant predictor of one-minute stock returns. This disparity is explained by high-frequency trading activity, which eliminates pricing inefficiencies at low latencies.

Suggested Citation

  • Rzayev, Khaladdin & Ibikunle, Gbenga, 2019. "A state-space modeling of the information content of trading volume," Journal of Financial Markets, Elsevier, vol. 46(C).
    • Handle: RePEc:eee:finmar:v:46:y:2019:i:c:s1386418118302519
    DOI: 10.1016/j.finmar.2019.100507
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    Cited by:

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    6. P. B. Lerner, 2020. "Dual State-Space Model of Market Liquidity: The Chinese Experience 2009-2010," Papers 2004.06200, arXiv.org, revised May 2020.
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    More about this item

    Keywords

    Trading volume; Permanent component; Transitory component; Market quality; Time series models; State-space modeling; High-frequency trading;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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