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Can Speculative Trading Explain the Volume-Volatility Relation?

Author

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  • Foster, F Douglas
  • Viswanathan, S

Abstract

The authors derive a speculative trading model with endogenous informed trading that yields a conditionally heteroskedastic time series for trading volume and the squared price changes. They use half-hourly price change and volume data for IBM during 1988 to test the model and estimate the structural parameters using the simulated method of moments estimation procedure. While the model seems to do a reasonable job fitting the unconditional moments of the volume and the squared priced change processes, it fares less well in fitting the relation between current trading volume and lags of trading volume; and squared volume's (and its lag) relation to squared price changes.

Suggested Citation

  • Foster, F Douglas & Viswanathan, S, 1995. "Can Speculative Trading Explain the Volume-Volatility Relation?," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 379-396, October.
  • Handle: RePEc:bes:jnlbes:v:13:y:1995:i:4:p:379-96
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    References listed on IDEAS

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