A reexamination of the relationship between volatility, liquidity and trading activity

Khine Kyaw, David Hillier

Research output: Contribution to journalArticle

Abstract

We investigate whether the relationship between equity trading activity, market liquidity and return volatility at the portfolio level is similar to the relationship at the individual security level. For the very largest firm-size portfolio, higher trading activity is positively associated with greater liquidity and more volatile returns. However, despite the volatility-liquidity relationship being the same for smaller equity portfolios, we find that higher trading activity is negatively associated with liquidity for this grouping. These contrasting relationships are shown to be caused by the interdynamics between all three variables and once we control for these interrelationships, the contrasting results disappear. The findings contribute to the debate on market behaviour that has taken on renewed vigour in recent years.
LanguageEnglish
Pages33-45
Number of pages13
JournalPecvnia. Revista de la Facultad de Ciencias Económicas y Empresariales, Universidad de León
Volume2011
DOIs
Publication statusPublished - 2013

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Trading activity
Liquidity
Equity
Market behavior
Return volatility
Market liquidity
Firm size
Interrelationship
Grouping
Market returns
Large firms

Keywords

  • liquidity
  • firm size
  • volatility
  • trading activity
  • strategic trading
  • LSE

Cite this

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