Trading Volume, Information, and Trading Costs: Empirical Evidence

30 Pages Posted: 9 Apr 2003

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Hoje Jo

Santa Clara University

Hersh Shefrin

Santa Clara University - Leavey School of Business

Abstract

This paper examines the empirical relation among trading volume, informational variables (i.e., precision and differential beliefs), the bid-ask spread components, and price volatility using a structural model that treats the spread components, trading volume, and price volatility as endogenous. Specifically, we investigate the direct and indirect effects of informational precision and differential beliefs on trading volume via a structural model representation in general and examine the theoretical ambiguity issue of George, Kaul, and Nimalendran (1994) in particular. Our empirical results indicate that although liquidity trading dampens the effect of informational precision on trading volume, the net effect of informational precision is positive. Also, while higher differential beliefs lead to greater trading by informed traders, it exerts a commensurate negative impact on liquidity trading. As a result, the net effect of differential beliefs on trading volume is insignificant. This new finding refutes the generally accepted belief in the volume literature that greater differences of opinion induce more trading.

Keywords: Trading volume, Information precision, Differential belief, Bid-ask spreads, Structural model

JEL Classification: G1

Suggested Citation

Chung, Kee H. and Jo, Hoje and Shefrin, Hersh, Trading Volume, Information, and Trading Costs: Empirical Evidence. Available at SSRN: https://ssrn.com/abstract=386360 or http://dx.doi.org/10.2139/ssrn.386360

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Hoje Jo

Santa Clara University ( email )

Santa Clara, CA 95053
United States
408-224-8890 (Phone)
408-554-4029 (Fax)

Hersh Shefrin

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

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