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Strategic Investor Behaviour and the Volume-Volatility Relation in Equity Markets

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Abstract

We examine the volume-volatility relation using detailed data from a limit order driven equity market. Estimates of the intraday slope of the demand and supply schedules of the order book are found to capture regularities in spreads, trade size and submission strategies which are believed to be related to asymmetric information. On a daily level, the order book slope should also captures differences in dispersion of beliefs about stock values. The relationship between our daily slope measure and the contemporaneous volatility across companies and time supports models where strategic trading and dispersion of beliefs increase both volume and volatility.

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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2003/9.

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Length: 46 pages
Date of creation: 16 Oct 2003
Date of revision:
Handle: RePEc:bno:worpap:2003_09

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Keywords: Market Microstructure; Volume-volatility relation; Equity trading; Asymmetric Information;

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Cited by:
  1. Ho, Kin-Yip & Zheng, Lin & Zhang, Zhaoyong, 2012. "Volume, volatility and information linkages in the stock and option markets," Review of Financial Economics, Elsevier, vol. 21(4), pages 168-174.
  2. Randi Næs, 2004. "Ownership Structure and Stock Market Liquidity," Working Paper 2004/6, Norges Bank.

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