1. Intraday Transactions, Volume and Volatility in Pre- and Post-Decimalization Regimes
- Author
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Talukdar, Bakhtear, Bhuyan, Rafiqul, Hamid, Shahid S., and Zhao, Le
- Subjects
Securities trading -- Analysis ,Business ,Economics - Abstract
This study examines changes in volume and transaction on volatility over the past three decades and tests two theoretical models, namely competitive and strategic models, using intraday quotes and trade data spanning from January 01, 1993 to December 31, 2019. We use 30-minute, 10-minute and 5-minute intervals. The sample period is carefully selected to encompass our analysis for various trading eras with different tick sizes. We find that volume is highly significant in both pre- and post-decimalization eras in explaining the volatility of returns. We also find that a strong positive relationship between volume and volatility exists, even after controlling for frequency of trades and before algorithmic trading came to dominate the market. We do, however, find a reduced ability of trading volume and frequency to explain volatility patterns in the recent period, coincident with the rise of algorithmic and high-frequency trading. We also document a shift in market relationships through time. JEL Classification: C02, D52, D53, G14, G15 Key Words: Volatility, GMM, Volume, Flash Crash, Liquidity, Volatility Smile, I. Introduction Is it volume or frequency of trades that transmits information to the market and drives volatility, and how does the relative contribution of each change over time? The [...]
- Published
- 2022