The Dark Side of Trading
44 Pages Posted: 4 Jan 2012
Date Written: January 3, 2012
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 two natural experiments (ETFs and 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 there is an economically substantial positive relation between volume of trading and stock volatility, especially when volume of trading is high. The conclusion is that stock trading can inject volatility above and beyond that based on fundamentals.
Keywords: volume, trading, volatility
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