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The Relationship between High Frequency Trading and Stock Market Volatility

Nilsson, Mattias LU and van den Hoorn, Dirk (2012) BUSN89 20121
Department of Business Administration
Abstract
This paper investigates the relationship between high frequency trading (HFT) activity and stock market volatility on the Nordic stock markets. The study utilizes a unique dataset that provides a proxy of the fraction of the total market turnover in which HFT firms were involved in the time period from March 2010 to March 2012. The study finds strong evidence for a positive contemporaneous relationship between stock market volatility and the participation level of HFT firms, both on an aggregate monthly and a daily basis. One of the primary concerns regarding HFT, the suggestion that HFTs decrease their trading activity or withdraw themselves from the market in highly volatile environments, does not appear from the analysis in this paper... (More)
This paper investigates the relationship between high frequency trading (HFT) activity and stock market volatility on the Nordic stock markets. The study utilizes a unique dataset that provides a proxy of the fraction of the total market turnover in which HFT firms were involved in the time period from March 2010 to March 2012. The study finds strong evidence for a positive contemporaneous relationship between stock market volatility and the participation level of HFT firms, both on an aggregate monthly and a daily basis. One of the primary concerns regarding HFT, the suggestion that HFTs decrease their trading activity or withdraw themselves from the market in highly volatile environments, does not appear from the analysis in this paper as the participation level of HFT firms is not materially different on the most volatile days compared to less volatile days. Although the Granger-causality test finds a significant bidirectional relationship between HFT activity and stock market volatility, i.e. increased levels of volatility being preceded by higher levels of HFT activity and vice versa, the study does not provide statistical evidence regarding causality in the more common sense, i.e. HFT exacerbating volatility or higher volatility increases HFTs’ activity. (Less)
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author
Nilsson, Mattias LU and van den Hoorn, Dirk
supervisor
organization
course
BUSN89 20121
year
type
H1 - Master's Degree (One Year)
subject
keywords
Algorithmic Trading, High Frequency Trading, Stock Market Volatility, Nordic Stock Markets, EGARCH, Granger-Causality
language
English
id
2837241
date added to LUP
2012-06-26 14:26:44
date last changed
2012-06-26 14:26:44
@misc{2837241,
  abstract     = {This paper investigates the relationship between high frequency trading (HFT) activity and stock market volatility on the Nordic stock markets. The study utilizes a unique dataset that provides a proxy of the fraction of the total market turnover in which HFT firms were involved in the time period from March 2010 to March 2012. The study finds strong evidence for a positive contemporaneous relationship between stock market volatility and the participation level of HFT firms, both on an aggregate monthly and a daily basis. One of the primary concerns regarding HFT, the suggestion that HFTs decrease their trading activity or withdraw themselves from the market in highly volatile environments, does not appear from the analysis in this paper as the participation level of HFT firms is not materially different on the most volatile days compared to less volatile days. Although the Granger-causality test finds a significant bidirectional relationship between HFT activity and stock market volatility, i.e. increased levels of volatility being preceded by higher levels of HFT activity and vice versa, the study does not provide statistical evidence regarding causality in the more common sense, i.e. HFT exacerbating volatility or higher volatility increases HFTs’ activity.},
  author       = {Nilsson, Mattias and van den Hoorn, Dirk},
  keyword      = {Algorithmic Trading,High Frequency Trading,Stock Market Volatility,Nordic Stock Markets,EGARCH,Granger-Causality},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Relationship between High Frequency Trading and Stock Market Volatility},
  year         = {2012},
}