A new interpretation of known facts: The case of two-way causality between trading and volatility

Christian Müller

Economic Modelling, 2012, vol. 29, issue 3, 664-670

Abstract: Efficient price setting implies that news create volatility since traders flock to the market in order to re-optimise their portfolios. In due course of the price finding process volatility should decline once the asset price approaches its new, efficient level. In this note I present evidence that the reverse mechanism plays as well. Traders genuinely increase volatility challenging the presumption that more traders help to identify the efficient price more quickly.

Keywords: Rational expectations; Uncertainty; Causality; Very high frequency data (search for similar items in EconPapers)
JEL-codes: B4 C5 F3 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:3:p:664-670

DOI: 10.1016/j.econmod.2012.01.011

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