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Trading Activity and Stock Price Volatility: Evidence from the London Stock Exchange

39 Pages Posted: 26 Feb 2006  

Roger D. Huang

University of Notre Dame

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Abstract

Analysis of FTSE 100 stock transactions data reported by the London Stock Exchange shows that trade frequency and average trade size impact price volatility for small trades (i.e. trades of one NMS or less). For large trades, only trade frequency affects price volatility. In further splitting small trades by relative size, trade frequency and average trade size are found to affect price volatility only for trades close to stocks' maximum guaranteed quoted depth. This evidence is consistent with microstructure models of dealer inventory adjustment and strategic behavior by informed traders, where dealers and uninformed traders face adverse selection costs.

Keywords: Trading size, trading frequency, price volatility, London Stock Exchange, transactions data, informed trading, market microstructure models

JEL Classification: G14, G12

Suggested Citation

Huang, Roger D. and Masulis, Ronald W., Trading Activity and Stock Price Volatility: Evidence from the London Stock Exchange. Journal of Empirical Finance, Vol. 10, No. 3, pp. 249-269, 2003. Available at SSRN: https://ssrn.com/abstract=884585

Roger D. Huang (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6370 (Phone)

Ronald W. Masulis

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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