Marketwide Private Information and Market Volatility-Volume Relation
35 Pages Posted: 25 May 2007
Date Written: May 2007
Abstract
This study investigates the different roles played by two components of trading volume, informed-trading and liquidity-trading, in the volatility-volume relation at the aggregate level. Using transaction data and an extended trading model of Easley, Kiefer, O'Hara and Paperman (1996), I estimate a marketwide private information arrival rate (PIAR) variable and use it to control for the informed trading component in trading volume. Contrary to the belief that aggregate trading volume mainly represents liquidity trading, the results show that the marketwide-private-information-trading component in aggregate trading volume is the underlying driving force for the positive volatility-volume relation.
Keywords: Private information, Volatility, Trading volume
JEL Classification: D82, G14
Suggested Citation: Suggested Citation
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