We investigate the volume-volatility relation and the effect of the number of trades and average trade size, institutional and individual trading, and order imbalance on price volatility. We document a positive relation between trading volume and volatility for stocks traded on the Australian Securities Exchange (ASX). We further show that the number of trades has a more significant effect on price volatility than average trade size. When the number of trades is decomposed into the number of trades of different sizes, the number of trades in the medium size category often has the most significant impact on volatility. The trading activity of both institutions and individuals are positively related to volatility, with individual trading has a more significant role in explaining price volatility than institutional trading. Finally, we document that on the ASX (a pure limit order book market) order imbalance - however it is important in explaining the volume-volatility dynamics - it is not the main factor driving this relation.
|Title of host publication
|Market Microstructure and Nonlinear Dynamics: Keeping Financial Crisis in Context
|Gilles Dufrenot, Fredj Jawadi, Wael Louhichi
|Place of Publication
|155 - 188
|Number of pages
|Published - 2014