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

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Author Info
Randi Naes ()
Johannes A. Skjeltorp () (Norges Bank)

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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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File URL: http://www.norges-bank.no/upload/import/publikasjoner/arbeidsnotater/pdf/arb-2003-09.pdf
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Publisher 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
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Handle: RePEc:bno:worpap:2003_09

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

Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G20 - Financial Economics - - Financial Institutions and Services - - - General

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January. [Downloadable!] (restricted)
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  3. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(3), pages 473-506. [Downloadable!] (restricted)
  4. Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2001. "Limit Order Book as a Market for Liquidity," CEPR Discussion Papers 2889, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 21-39, March. [Downloadable!]
  6. Huang, Roger D. & Masulis, Ronald W., 2003. "Trading activity and stock price volatility: evidence from the London Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 249-269, May. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
  19. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September. [Downloadable!] (restricted)
  20. Harris, Lawrence, 1986. "Cross-Security Tests of the Mixture of Distributions Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(01), pages 39-46, March. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Randi Næs, 2004. "Ownership Structure and Stock Market Liquidity," Working Paper 2004/6, Norges Bank. [Downloadable!]
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