More documents from Lillo, Fabrizio; Gillemot, Laszlo; Farmer, J D
More documents from Quantitative Finance

Export to your Reference Manger

Please Copy & Paste



Bookmark and Share

There's more to volatility than volume

[journal article]

Lillo, Fabrizio; Gillemot, Laszlo; Farmer, J D

fulltextDownloadDownload full text

(783 KByte)

Citation Suggestion

Please use the following Persistent Identifier (PID) to cite this document:

Further Details
Abstract It is widely believed that fluctuations in transaction volume, as reflected in the number of transactions and to a lesser extent their size, are the main cause of clustered volatility. Under this view bursts of rapid or slow price diffusion reflect bursts of frequent or less frequent trading, which cause both clustered volatility and heavy tails in price returns. We investigate this hypothesis using tick by tick data from the New York and London Stock Exchanges and show that only a small fraction of volatility fluctuations are explained in this manner. Clustered volatility is still very strong even if price changes are recorded on intervals in which the total transaction volume or number of transactions is held constant. In addition the distribution of price returns conditioned on volume or transaction frequency being held constant is similar to that in real time, making it clear that neither of these are the principal cause of heavy tails in price returns. We analyze recent results of Ane and Geman (2000) and Gabaix et al. (2003), and discuss the reasons why their conclusions differ from ours. Based on a cross-sectional analysis we show that the long-memory of volatility is dominated by factors other than transaction frequency or total trading volume.
Classification Political Economy
Free Keywords Volatility Modelling; Transaction Frequency; Trading Volume; Market Structure
Document language English
Publication Year 2006
Page/Pages p. 371-384
Journal Quantitative Finance, 6 (2006) 5
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)