The Impact of Trades on Daily Volatility

46 Pages Posted: 21 Mar 2004

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Tarun Chordia

Emory University - Department of Finance

Amit Goyal

University of Lausanne; Swiss Finance Institute

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2004

Abstract

This paper proposes a trading-based explanation for the asymmetric effect in daily volatility of individual stock returns. Previous studies propose two major hypotheses for this phenomenon: leverage effect and time varying expected returns. However, leverage has no impact on asymmetric volatility at the daily frequency and, moreover, we observe asymmetric volatility for stocks with no leverage. Also, expected returns may vary with the business cycle, i.e., at a lower than daily frequency. Trading activity of contrarian and herding investors has a robust effect on the relationship between daily volatility and lagged return. Consistent with the predictions of the rational expectations models, non-informational liquidity driven (herding) trades increase volatility following stock price declines and informed (contrarian) trades reduce volatility following stock price increases. The results are robust to different measures of volatility and trading activity.

Keywords: asymmetric volatility, informed trades, liquidity based trades

JEL Classification: C50

Suggested Citation

Avramov, Doron and Chordia, Tarun and Goyal, Amit, The Impact of Trades on Daily Volatility (March 15, 2004). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=517962 or http://dx.doi.org/10.2139/ssrn.517962

Doron Avramov (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Amit Goyal

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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