Trading Activity and Realized Volatility: Evidence with Decomposed Trading Volume and Order Imbalance
Sze Shih Ting
Don (Tissa) U. A. Galagedera
Monash University - Department of Econometrics and Business Statistics
University of Western Australia; Financial Research Network (FIRN)
Robert Darren Brooks
Monash University; Financial Research Network (FIRN)
August 23, 2010
23rd Australasian Finance and Banking Conference 2010 Paper
This study investigates the relation between decomposed trading volume (number of trades and average trade size) and realized volatility and its continuous and jump components. Considering buyer-initiated and seller-initiated trades and investigate whether buyer and seller initiated trades as two factors of realized volatility, we investigate whether they have an asymmetric effect on realized volatility. The stocks in the ASX50 sampled over the period January 1996 to April 2010 reveal that realized volatility and its continuous component in the returns has a positive association with trading volume, number of trades and average trade size. The association between the jump component of realized volatility and trading volume and the number of trades is negative. The buyer and seller initiated trades do not appear to explain realized volatility well. These results are robust to the GMM estimation and in sub-period analysis.
Number of Pages in PDF File: 37
Keywords: Trading activity, realized volatility, order imbalance
JEL Classification: G10, G12, G13working papers series
Date posted: August 25, 2010 ; Last revised: November 24, 2010
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