Daily Return Volatility, Bid-Ask Spreads, and Information Flow: Analyzing the Information Content of Volume

Jinliang Li and Chunchi Wu
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Jinliang Li: Northeastern University
Chunchi Wu: Singapore Management University and Syracuse University

Journal of Business, 2006, vol. 79, issue 5, pages 2697-2740

Abstract: This paper examines the relationship among daily information flow, return volatility, and bid-ask spreads based on the framework of the mixture of distribution hypothesis (MDH). The MDH model is modified to permit separate effects of informed and liquidity trading volume on return volatility. The results show that the positive relationship between volatility and volume is primarily driven by the informed component of trading. When we control for the information flow, volatility is negatively related to trading volume. Furthermore, bid-ask spreads are positively related to the intensity of information flow.

Date: 2006

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Persistent link: http://EconPapers.repec.org/RePEc:ucp:jnlbus:v:79:y:2006:i:5:p:2697-2740

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