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The impact of trades on daily volatility

journal contribution
posted on 2006-12-01, 00:00 authored by D Avramov, Tarun ChordiaTarun Chordia, A Goyal
This article proposes a trading-based explanation for the asymmetric effect in daily volatility of individual stock returns. Previous studies propose two major hypotheses for this phenomenon: leverage effect and time-varying expected returns. However, leverage has no impact on asymmetric volatility at the daily frequency and, moreover, we observe asymmetric volatility for stocks with no leverage. Also, expected returns may vary with the business cycle, that is, at a lower than daily frequency. Trading activity of contrarian and herding investors has a robust effect on the relationship between daily volatility and lagged return. Consistent with the predictions of the rational expectation models, the non-informational liquidity-driven (herding) trades increase volatility following stock price declines, and the informed (contrarian) trades reduce volatility following stock price increases. The results are robust to different measures of volatility and trading activity.

History

Journal

Review of financial studies

Volume

19

Issue

4

Season

Winter

Pagination

1241 - 1277

Publisher

Oxford University Press

Location

Oxford, Eng.

ISSN

0893-9454

eISSN

1465-7368

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2006, The Author

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