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The volume-implied volatility relation in financial markets: A behavioral explanation

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  • Cheuathonghua, Massaporn
  • Padungsaksawasdi, Chaiyuth

Abstract

We examine the relation between trading volume and associated CBOE’s implied volatility in commodity ETFs, stock market indices, and stock market index ETFs by employing a new perspective, behavioral concepts. Availability, conservatism, and extrapolation biases work well in explaining the trading volume-implied volatility relations in all types of assets. Coefficients of contemporaneous and lagged trading volumes are statistically significant, showing that investors rely on recently observed or experienced due to their fresh memory and recent experience. This is supported by availability and conservatism biases. In addition, given statistically significant coefficients of lead trading volume, traders also overweigh recent situations when making a decision and are slow to change their former beliefs in the arrival of new information, supported by conservatism and extrapolation biases. The relation is more pronounced in the most extreme quintiles, demonstrating an asymmetric trading volume-implied volatility relation. Of all, the relation of euro currency is weakest. We conclude that difference in findings depends on types of assets, which have different patterns of volatility skew.

Suggested Citation

  • Cheuathonghua, Massaporn & Padungsaksawasdi, Chaiyuth, 2024. "The volume-implied volatility relation in financial markets: A behavioral explanation," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:ecofin:v:71:y:2024:i:c:s1062940824000238
    DOI: 10.1016/j.najef.2024.102098
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    More about this item

    Keywords

    Implied volatility; Trading volume; Commodity; ETF; Heuristics; Behavioral finance;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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