39 Pages Posted: 26 Feb 2006
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: 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