Market Microstructure Effects On Volatility At The Taifex PDF Download

This paper examines empirically the volatility-volume relationship implied by various market microstructure models which associate movements in prices and trading volume with information, dispersion of beliefs and trading motives. Our unique dataset allows to investigate whether different types of traders (members vs non-members, institutional vs individual) have a positive or negative effect upon volatility. Our empirical results show that surprises in non-member investors' trading volume are positively related with volatility in most of the cases. These results are more reinforcing in the case of log-volume and generally consistent with existing theoretical and empirical evidence. As regards member investors, we primarily find that unexpected volume is positively related to volatility, providing further support for the argument that informed rational speculators exacerbate volatility especially when noise traders follow positive feedback strategies. Another result of our study is that the coefficients relating the unexpected component of open interest with volatility are uniformly negative, implying that an increase in open interest during the day lessens the impact of a volume shock in volatility. Finally, when we allow for time-to-maturity effects, non-member institutional investors are not associated with any movement in volatility while surprises in open interest are associated with more volatility towards the end of the contract life.