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The Impact of Trades on Daily Volatility

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Author Info
Doron Avramov
Tarun Chordia
Amit Goyal
Abstract

This article proposes a trading-based explanation for the asymmetric effect in daily volatility of individual stock returns. Previous studies propose two major hypotheses for this phenomenon: leverage effect and time-varying expected returns. However, leverage has no impact on asymmetric volatility at the daily frequency and, moreover, we observe asymmetric volatility for stocks with no leverage. Also, expected returns may vary with the business cycle, that is, at a lower than daily frequency. Trading activity of contrarian and herding investors has a robust effect on the relationship between daily volatility and lagged return. Consistent with the predictions of the rational expectation models, the non-informational liquidity-driven (herding) trades increase volatility following stock price declines, and the informed (contrarian) trades reduce volatility following stock price increases. The results are robust to different measures of volatility and trading activity. (JEL C30, G11, G12) Copyright 2006, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhj027
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Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 19 (2006)
Issue (Month): 4 ()
Pages: 1241-1277
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Handle: RePEc:oup:rfinst:v:19:y:2006:i:4:p:1241-1277

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  1. Diether, Karl B. & Lee, Kuan-Hui & Werner, Ingrid M., 2007. "Can Short-Sellers Predict Returns? Daily Evidence," Working Paper Series 2005-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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