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The Dark Side of Trading

54 Pages Posted: 4 Feb 2011  

Ilia D. Dichev

Emory University - Department of Accounting

Kelly Huang

Florida International University

Dexin Zhou

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance

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Date Written: January 4, 2011

Abstract

This study investigates the effect of high trading volume on observed stock volatility. The motivation is that volumes of U.S. trading have increased more than 30-fold over the last 50 years, truly transforming the marketplace. Given existing work that links volume and volatility as simultaneously driven by fundamental information, we are specifically interested in the effect of increased trading controlling for such information. We investigate a number of settings, including a mix of natural experiments (exchange switches, S&P 500 changes, dual-class shares), the aggregate time-series of U.S. stocks since 1926, and the cross-section of U.S. stocks during the last 20 years. Our main finding is that, controlling for other factors, there is a reliable and economically substantial positive relation between volume of trading and stock volatility. The conclusion is that stock trading produces its own volatility above and beyond that based on fundamentals.

Keywords: Trading, Volume, Volatility

Suggested Citation

Dichev, Ilia D. and Huang, Kelly and Zhou, Dexin, The Dark Side of Trading (January 4, 2011). Emory Law and Economics Research Paper No. 11-95; Emory Public Law Research Paper No. 11-143; AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1754215 or http://dx.doi.org/10.2139/ssrn.1754215

Ilia D. Dichev (Contact Author)

Emory University - Department of Accounting ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Kelly Huang

Florida International University ( email )

11200 SW 8th Street
Miami, FL 33199
United States

Dexin Zhou

City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

55 Lexington Avenue
New York, NY 10010
United States

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