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Volume of Trading and Stock Volatility in the Swedish Market

Maria Gudmundsdottir, Erla LU (2012) NEKN02 20121
Department of Economics
Abstract
Recent studies have shown that increased liquidity is perhaps not always strictly beneficial and that high trading volumes can produce trading noise causing increased volatility above that based on fundamentals. This study investigates whether this applies to the Swedish stock market by analyzing dual-class stocks that have the same cash flow rights but different control rights and different trading volumes. The experiment investigates the effect of volume on observed stock volatility while naturally controlling for the flow of fundamental information. The results indicate that shares with higher trading volume have lower volatility compared to shares with low trading volume. There is no evidence of high trading volumes causing increased... (More)
Recent studies have shown that increased liquidity is perhaps not always strictly beneficial and that high trading volumes can produce trading noise causing increased volatility above that based on fundamentals. This study investigates whether this applies to the Swedish stock market by analyzing dual-class stocks that have the same cash flow rights but different control rights and different trading volumes. The experiment investigates the effect of volume on observed stock volatility while naturally controlling for the flow of fundamental information. The results indicate that shares with higher trading volume have lower volatility compared to shares with low trading volume. There is no evidence of high trading volumes causing increased volatility and it could be argued that increased liquidity is still beneficial in the Swedish stock market as it is likely to lead to lower volatility and prices closer to their fundamental values. However, more research is needed as this study is rather restrictive and is not generalizable over all shares traded in the market. (Less)
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author
Maria Gudmundsdottir, Erla LU
supervisor
organization
course
NEKN02 20121
year
type
H1 - Master's Degree (One Year)
subject
keywords
volume, volatility, liquidity
language
English
id
2701845
date added to LUP
2012-06-08 14:32:38
date last changed
2012-06-08 14:32:38
@misc{2701845,
  abstract     = {Recent studies have shown that increased liquidity is perhaps not always strictly beneficial and that high trading volumes can produce trading noise causing increased volatility above that based on fundamentals. This study investigates whether this applies to the Swedish stock market by analyzing dual-class stocks that have the same cash flow rights but different control rights and different trading volumes. The experiment investigates the effect of volume on observed stock volatility while naturally controlling for the flow of fundamental information. The results indicate that shares with higher trading volume have lower volatility compared to shares with low trading volume. There is no evidence of high trading volumes causing increased volatility and it could be argued that increased liquidity is still beneficial in the Swedish stock market as it is likely to lead to lower volatility and prices closer to their fundamental values. However, more research is needed as this study is rather restrictive and is not generalizable over all shares traded in the market.},
  author       = {Maria Gudmundsdottir, Erla},
  keyword      = {volume,volatility,liquidity},
  language     = {eng},
  note         = {Student Paper},
  title        = {Volume of Trading and Stock Volatility in the Swedish Market},
  year         = {2012},
}