Trading Activity, Quoted Liquidity, and Stock Volatility

29 Pages Posted: 18 Jul 2015

See all articles by Li Jiang

Li Jiang

Hong Kong Polytechnic University

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business

Date Written: 1997

Abstract

In this article, we examine dynamic relationships between volatility and various microstructure measures of trade activity and quoted liquidity for each component stock in the Toronto Stock Exchange 35 Index and for the Toronto 35 Index Participation Shares. When volatility is conditioned on number of trades and quoted liquidity, trading volume provides no incremental explanatory power. Thus, the number of trades appears to be a better proxy for information flow. Furthermore, investigation into partitioned volume suggests that the number of trades is more effective than the unexpected volume in explaining volatility. Measures of quoted liquidity also play a significant role in explaining intra day volatility. Bid-ask spreads and quote depth are positively and negatively related to volatility, respectively. Consistent with the lack of information signal, no trade outcomes are negatively related to volatility.

Keywords: volatility; volatility determinants; and market microstructure

JEL Classification: G10

Suggested Citation

Jiang, Li and Kryzanowski, Lawrence, Trading Activity, Quoted Liquidity, and Stock Volatility (1997). Multinational Finance Journal, Vol. 1, No. 3, p. 199-227, 1997, Available at SSRN: https://ssrn.com/abstract=2631560

Li Jiang (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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