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Daily Return Volatility, Bid-Ask Spreads, and Information Flow: Analyzing the Information Content of Volume

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Author Info

  • Jinliang Li

    (Northeastern University)

  • Chunchi Wu

    (Singapore Management University and Syracuse University)

Abstract

This paper examines the relationship among daily information flow, return volatility, and bid-ask spreads based on the framework of the mixture of distribution hypothesis (MDH). The MDH model is modified to permit separate effects of informed and liquidity trading volume on return volatility. The results show that the positive relationship between volatility and volume is primarily driven by the informed component of trading. When we control for the information flow, volatility is negatively related to trading volume. Furthermore, bid-ask spreads are positively related to the intensity of information flow.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 79 (2006)
Issue (Month): 5 (September)
Pages: 2697-2740

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Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:5:p:2697-2740

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Louhichi, Waƫl, 2011. "What drives the volume-volatility relationship on Euronext Paris?," International Review of Financial Analysis, Elsevier, vol. 20(4), pages 200-206, August.
  2. Sami, Heibatollah & Zhou, Haiyan, 2008. "Do auditing standards improve the accounting disclosure and information environment of public companies? Evidence from the emerging markets in China," The International Journal of Accounting, Elsevier, vol. 43(2), pages 139-169.
  3. S. Bhaumik & M. Karanasos & A. Kartsaklas, 2008. "Derivatives Trading and the Volume-Volatility Link in the Indian Stock Market," William Davidson Institute Working Papers Series wp935, William Davidson Institute at the University of Michigan.

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