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Returns and Volume: Between Information andLiquidity

Author

Listed:
  • Serge Darolles
  • Gaëlle Le Fol
  • Gulten Mero

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper develops a model for stock trading which takes intoaccount both information and liquidity shocks. First, we distinguishbetween two trading strategies, information-based and liquidity-basedtrading, and suggest that their respective impacts on returns andtraded volume should be modelized differently. Second, we focus on thecontemporaneous volatility-volume relationship to model impacts of in-formation and liquidity. We relax the hypothesis of absence of liquidityproblems and extend the standard mixture of distribution hypothesis(MDH) framework. This paper develops a modified MDH model whichtakes into account information and liquidity shocks. Third, we showhow to use a structural model to exploit the volume-volatility rela-tion in order to decompose the traded volume for a given stock intotwo components. Thus, we separate information from liquidity impacton the observed daily volume. This allows us to extract an averageintra-day liquidity measure using daily data.

Suggested Citation

  • Serge Darolles & Gaëlle Le Fol & Gulten Mero, 2009. "Returns and Volume: Between Information andLiquidity," Post-Print halshs-00391286, HAL.
    • Handle: RePEc:hal:journl:halshs-00391286
    as

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