Daily Return Volatility, Bid-Ask Spreads and Information Flow: Analyzing the Information Content of Volume
Posted: 11 Apr 2005 Last revised: 6 Jul 2009
Date Written: 2006 9, 1
This paper examines the relationship among daily information flow, return volatility, and bid-ask spreads based on the framework of the Mixture of Distribution Hypothesis (MDH). The MDH model is modified to permit separate effects of informed and liquidity trading volume on return volatility. The results show that the positive relationship between volatility and volume is primarily driven by the informed component of trading. Controlling for the information flow, volatility is negatively related to trading volume. Furthermore, bid-ask spreads are positively related to the intensity of information flow.
Keywords: Volume, volatility, latent variable
JEL Classification: G10, F14
Suggested Citation: Suggested Citation