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Evolution of Transitory Volatility over the Week

Author

Listed:
  • Charles Cao

    () (Department of Finance, Smeal College of Business Administration, Pennsylvania State University)

  • Hyuk Choe

    () (College of Business Administration, Seoul National University)

Abstract

This study examines the evolution of transitory volatility over the week for NYSE/AMEX stocks. We treat the block of five trading days during a week as a single trading session and control for disproportionate rates of information arrival over the week by comparing variances of weekly returns measured on different days of the week. Our evidence, from both portfolios and individual stocks, is largely consistent with the implications of price formation models. We find that prices on Mondays contain significantly greater transitory volatility than prices on the other days of the week. Transitory volatility declines steadily over the week. Cross-sectionally, the speed and magnitude of dissipation of transitory volatility are greater for larger firms. Portfolio returns exhibit a much stronger pattern, suggesting that much of transitory volatility varying in the process of price formation is not diversifiable. Similar evidence is obtained from our analyses of the Dow Jones Index, the S\&P 500 index futures and the Japanese Nikkei 225 Index.

Suggested Citation

  • Charles Cao & Hyuk Choe, 2000. "Evolution of Transitory Volatility over the Week," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 49-77, May.
  • Handle: RePEc:cuf:journl:y:2000:v:1:i:1:p:49-77
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    References listed on IDEAS

    as
    1. Burton Hollifield & Robert A. Miller & Patrik Sandås, 2004. "Empirical Analysis of Limit Order Markets," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1027-1063.
    2. Dutta, Prajit K & Madhavan, Ananth, 1997. " Competition and Collusion in Dealer Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 245-276, March.
    3. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-1161, September.
    4. Cohen, Kalman J & Conroy, Robert M, 1990. "An Empirical Study of the Effect of Rule 19c-3," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 277-305, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Transitory volatility; Price formation; Exogenous liquidity demand;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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