Daily Return Volatility, Bid-Ask Spreads and Information Flow: Analyzing the Information Content of Volume

Posted: 11 Apr 2005 Last revised: 6 Jul 2009

See all articles by Jinliang Li

Jinliang Li

Tsinghua University - School of Economics & Management

Chunchi Wu

SUNY at Buffalo - School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: 2006 9, 1

Abstract

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

Li, Jinliang and Wu, Chunchi, Daily Return Volatility, Bid-Ask Spreads and Information Flow: Analyzing the Information Content of Volume (2006 9, 1). Journal of Business, Forthcoming, Available at SSRN: https://ssrn.com/abstract=664086

Jinliang Li

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Chunchi Wu (Contact Author)

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

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