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Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models
Author(s) -
FOSTER F. DOUGLAS,
VISWANATHAN S.
Publication year - 1993
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1993.tb04706.x
Subject(s) - volatility (finance) , economics , adverse selection , financial economics , stock exchange , stock (firearms) , stock trading , econometrics , monetary economics , business , stock market , finance , mechanical engineering , paleontology , horse , engineering , biology
Patterns in stock market trading volume, trading costs, and return volatility are examined using New York Stock Exchange data from 1988. Intraday test results indicate that, for actively traded firms trading volume, adverse selection costs, and return volatility are higher in the first half‐hour of the day. This evidence is inconsistent with the Admati and Pfleiderer (1988) model which predicts that trading costs are low when volume and return volatility are high. Interday test results show that, for actively traded firms, trading volume is low and adverse selection costs are high on Monday, which is consistent with the predictions of the Foster and Viswanathan (1990) model.