THE EMPIRICAL RELATIONSHIP BETWEEN TRADING VOLUME,RETURNS AND VOLATILITY

This paper presents an empirical analysis of the relationship between trading volume, returns and volatility in the Australian stock market. The initial analysis centres upon the volume-price change relationship. The relationship between trading volume and returns, irrespective of the direction of the price change, is significant across three alternative measures of daily trading volume for the aggregate market. This finding also provides basic support for a positive relationship between trading volume and volatility. Furthermore, evidence is found supporting the hypothesis that the volume-price change slope for negative returns is smaller than the slope for non-negative returns, thereby supporting an asymmetric relationship which is hypothesised to exist because of differential costs of taking long and short positions. Analysis at the individual stock level shows weaker support for the relationship. A second related hypothesis is tested in which the formation of returns is conditional upon information arrival which similarly affects trading volume. The hypothesis is tested by using the US overnight return to proxy for expected “news” and trading volume to proxy for news arrival during the day. The results show a reduction in the significance and magnitude of persistence in volatility and hence are consistent with explaining non-normality in returns (and ARCH effects) through the rate of arrival of information. The findings in this paper help explain how returns are generated and have implications for inferring return behaviour from trading volume data.     

VOLATILITY SPILLOVERS BETWEEN THE BLACK MARKET AND OFFICIAL MARKET FOR FOREIGN CURRENCY IN GREECE

The issue of volatility spillovers between the black and official exchange markets for U.S. dollars in Greece for 1975–89 is examined. A vector error correction‐bivariate EGARCH model is developed and estimated to capture potential asymmetric effects of innovations and volatility. During the period under investigation, reciprocal spillovers are found between the black and official exchange markets for dollars. Furthermore, spillovers are asymmetric in that bad news in one market has a greater effect on the volatility of the other market than good news. Additionally, the size of spillover effects is greater from the official market to the black market. Finally, the removal of the foreign exchange controls in January 1986 made the volatility of the official exchange rate higher and changed the nature of volatility spillovers between the two markets. JEL Classification: F31, F32     

MARKET STRUCTURE AND TRADING VOLUME

Historically, trading volume reported for NASDAQ stocks has been overstated vis‐à‐vis New York Stock Exchange (NYSE) stocks, both because of the dealer's participation in trades as a market maker and because of interdealer trading. Beginning in 1997, the Securities and Exchange Commission changed order‐handling rules and trade‐reporting rules, which may have reduced or eliminated the overstatement of NASDAQ trading. We examine trading volumes of firms changing from NASDAQ to the NYSE since 1997 and document that reported trading volume for NASDAQ stocks continues to be overstated. Moreover, the degree of overstatement is much larger for firms with high trading volume.     

THE OVER-THE-COUNTER MARKET AND NEW YORK STOCK EXCHANGE TRADING HALTS

This paper examines the over-the-counter (OTC) market activities for stocks temporarily suspended by the New York Stock Exchange (NYSE). Unlike previous studies, we use transaction-to-transaction data on the NASDAQ during NYSE trading halts to investigate the price adjustment process between market equilibria. The evidence indicates that while being halted by the NYSE, the same stocks have exhibited significantly greater volatility in the OTC market. Since the volatile price movement is mainly random and provides no arbitraging opportunities for the OTC market traders, we do not find support for the proposal that trading halts should be mandatory for all trading locations.     

VOLATILITY FORECASTS,TRADING VOLUME,AND THE ARCH VERSUS OPTION‐IMPLIED VOLATILITY TRADE‐OFF

We investigate empirically the role of trading volume (1) in predicting the relative informativeness of volatility forecasts produced by autoregressive conditional heteroskedasticity (ARCH) models versus the volatility forecasts derived from option prices, and (2) in improving volatility forecasts produced by ARCH and option models and combinations of models. Daily and monthly data are explored. We find that if trading volume was low during period t?1 relative to the recent past, ARCH is at least as important as options for forecasting future stock market volatility. Conversely, if volume was high during period t?1 relative to the recent past, option‐implied volatility is much more important than ARCH for forecasting future volatility. Considering relative trading volume as a proxy for changes in the set of information available to investors, our findings reveal an important switching role for trading volume between a volatility forecast that reflects relatively stale information (the historical ARCH estimate) and the option‐implied forward‐looking estimate.     

MARKET STRUCTURE AND REPORTED TRADING VOLUME: NASDAQ VERSUS THE NYSE

Trading volume for common stocks is of interest to financial economists, investors, and securities lawyers. NASDAQ is a dealer market where trades with dealers are included in reported trading volume. This procedure does not accurately measure the trading volume by public buyers and sellers. Trading volume reported on the NYSE, which is primarily an auction market, provides a much closer measure of trades by public investors. We examine a sample of firms whose stock traded on the NASDAQ/NMS and subsequently on the NYSE. When trading switches to the NYSE, the firms' trading volume drops to about 50 percent of the volume previously reported on NASDAQ. A control group of firms that switched from the AMEX to the NYSE shows a small, but statistically insignificant, increase in trading volume.     

SLIPPAGE AND THE CHOICE OF MARKET OR LIMIT ORDERS IN FUTURES TRADING

Retail futures traders face uncertainty regarding the price they will obtain when trading. This price surprise, known as slippage, can be substantial. Using unique data from an introducing brokerage for Chicago Board of Trade (CBOT) wheat, corn, and soybean futures contracts, we quantify time-to-clear and the magnitude of slippage. We then identify factors that affect these trade quality measures. Finally, we analyze individual trader choice between market and limit orders and find that the likelihood of placing limit orders, where regulations protect traders from slippage, is greater when order and market characteristic indicate that adverse slippage is likely.     

INFORMED TRADING RISK AND BID-ASK SPREAD CHANGES AROUND OPEN MARKET STOCK REPURCHASES IN THE NASDAQ MARKET

Microstructure theory contends that dealers' bid-ask spreads should vary intertemporally with changes in the asymmetric information component of the spread. Corporate theory suggests that stock repurchase announcements signal management's private information to the securities markets. An examination of dealers' spread behavior around firms' open market repurchases in the NASDAQ market reveals a decline in spreads adjusted for dealers' inventory-holding and order-processing costs. This decline is attributed to a reduction in informed trading risk associated with the open market repurchase announcements.     

THE EFFECTS OF DECIMALIZATION ON RETURN VOLATILITY COMPONENTS,SERIAL CORRELATION,AND TRADING COSTS

We examine the composition of return volatility, serial correlation, and trading costs before and after decimalization on the New York Stock Exchange. We decompose the variance of price changes into components associated with public news, rounding errors, and market‐making frictions. We find that when stocks move from a fractional to a decimal trading system, the variance components due to market‐making frictions and rounding errors decline significantly, whereas the component due to public news remains unchanged. The serial correlation of price changes weakens substantially after decimalization. The uninformed component of bid‐ask spreads decreases significantly whereas the informed component has no significant change.     

MARKET VOLATILITY AND PERVERSE TIMING PERFORMANCE OF MUTUAL FUND MANAGERS

Prompted by the recent volatility in equity markets, I investigate performance evaluation methods and the mutual fund managers' ability to select undervalued investments and time major market movements during the high-market-volatility period of the 1980s. Specifically, I examine mutual fund managers' stock-selection and market-timing abilities by employing a five-factor risk-adjusted model based on Carhart's four-factor loading model and Bhattacharya and Pfleiderer's quadratic timing model adjusted for perverse timing behavior. Individually, some managers persistently affect fund performance through the selection of undervalued investments, however, at the expense of timing performance. In addition, funds that demonstrate an ability to time major market movements showed persistence in timing performance before and after the October market crash of 1987.     

TRADING TIME EFFECTS IN FINANCIAL AND COMMODITY FUTURES MARKETS

Through the examination of one commodity contract, soybeans, and one financial contract, U.S. Treasury bonds, the authors test to determine (1) whether mean rates of return during trading times differ from mean rates of return during nontrading times; (2) whether mean returns during trading times and nontrading times differ by day of the week; (3) whether trading time returns differ significantly from previous nontrading time returns; and (4) the extent to which trading and previous nontrading returns are correlated. In addition, the authors empirically examine a possible explanation for the results obtained.