There's More to Volatility than Volume

26 Pages Posted: 18 Oct 2005

See all articles by Laszlo Gillemot

Laszlo Gillemot

Santa Fe Institute; Budapest University of Technology and Economics

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; Santa Fe Institute

Fabrizio Lillo

Università di Bologna

Date Written: September 29, 2005

Abstract

It is widely believed that fluctuations in transaction volume, as reflected in the number of transactions and to a lesser extent their size, are the main cause of clustered volatility. Under this view bursts of rapid or slow price diffusion reflect bursts of frequent or less frequent trading, which cause both clustered volatility and heavy tails in price returns. We investigate this hypothesis using tick by tick data from the New York and London Stock Exchanges and show that only a small fraction of volatility fluctuations are explained in this manner. Clustered volatility is still very strong even if price changes are recorded on intervals in which the total transaction volume or number of transactions is held constant. In addition the distribution of price returns conditioned on volume or transaction frequency being held constant is similar to that in real time, making it clear that neither of these are the principal cause of heavy tails in price returns. We analyze recent results of Ane and Geman (2000) and Gabaix et al. (2003), and discuss the reasons why their conclusions differ from ours. Based on a cross-sectional analysis we show that the long-memory of volatility is dominated by factors other than transaction frequency or total trading volume.

Keywords: Volatility clustering, transaction frequency, alternative time clocks

JEL Classification: C81, D40, D44, G10, G15

Suggested Citation

Gillemot, Laszlo and Farmer, J. Doyne and Lillo, Fabrizio, There's More to Volatility than Volume (September 29, 2005). Available at SSRN: https://ssrn.com/abstract=820865 or http://dx.doi.org/10.2139/ssrn.820865

Laszlo Gillemot (Contact Author)

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Budapest University of Technology and Economics ( email )

Muegyetem rkp. 3-9
H-1111 Budapest
Hungary

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

HOME PAGE: http://www.inet.ox.ac.uk/people/view/4

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States
505-984-8800 (Phone)
505-982-0565 (Fax)

HOME PAGE: http://www.santafe.edu/~jdf/

Fabrizio Lillo

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

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