Private Information, Trading Volume, and Stock Return Variances

Michael J. Barclay, Robert H. Litzenberger and Jerold B. Warner

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: The institutional features of the Tokyo Stock Exchange allow tests that provide new insights into the determinants of stock return variances. When the exchange is open on Saturday, the weekend variance is roughly 60% higher than when it is closed. However, weekly variances are not increased by Saturday trading. The increase in weekend volume and variance caused by Saturday trading is offset by lower volume and variance on surrounding days. These results are consistent with the view that Saturday trading changes the timing of trades, and that variance is caused by private information revealed through trading. US stocks traded on Tokyo or Japanese stocks traded on the NYSE have increased trading hours, but trading of stock on a foreign exchange is typically light relative to domestic volume. The increased trading hours are not associated with an increase in stock return variance. This suggests that substantial volume is required for private information to be incorporated into stock prices and that there is no casual relation between trading hours and stock return variance.

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