Trading Activity and Stock Price Volatility: Evidence from the London Stock Exchange
Roger D. Huang
University of Notre Dame
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
Journal of Empirical Finance, Vol. 10, No. 3, pp. 249-269, 2003
Analysis of FTSE 100 stock transactions data reported by the London Stock Exchange shows that trade frequency and average trade size impact price volatility for small trades (i.e. trades of one NMS or less). For large trades, only trade frequency affects price volatility. In further splitting small trades by relative size, trade frequency and average trade size are found to affect price volatility only for trades close to stocks' maximum guaranteed quoted depth. This evidence is consistent with microstructure models of dealer inventory adjustment and strategic behavior by informed traders, where dealers and uninformed traders face adverse selection costs.
Number of Pages in PDF File: 39
Keywords: Trading size, trading frequency, price volatility, London Stock Exchange, transactions data, informed trading, market microstructure models
JEL Classification: G14, G12Accepted Paper Series
Date posted: February 26, 2006
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