The impact of trades on daily volatility

Doron Avramov, Tarun Chordia, Amit Goyal*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

150 Scopus citations

Abstract

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. (JEL C30, G11, G12).

Original languageAmerican English
Pages (from-to)1241-1277
Number of pages37
JournalReview of Financial Studies
Volume19
Issue number4
DOIs
StatePublished - Dec 2006
Externally publishedYes

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