Returns and Volume: Between Information andLiquidity

Serge Darolles, Gaelle Le Fol and Gulten Mero
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Gulten Mero: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper develops a model for stock trading which takes intoaccount both information and liquidity shocks. First, we distinguishbetween two trading strategies, information-based and liquidity-basedtrading, and suggest that their respective impacts on returns andtraded volume should be modelized differently. Second, we focus on thecontemporaneous volatility-volume relationship to model impacts of in-formation and liquidity. We relax the hypothesis of absence of liquidityproblems and extend the standard mixture of distribution hypothesis(MDH) framework. This paper develops a modified MDH model whichtakes into account information and liquidity shocks. Third, we showhow to use a structural model to exploit the volume-volatility rela-tion in order to decompose the traded volume for a given stock intotwo components. Thus, we separate information from liquidity impacton the observed daily volume. This allows us to extract an averageintra-day liquidity measure using daily data.

Keywords: Volatility-volume relationship; mixture of distribution hypothesis; liquidity shocks; information-based trading; liquidity arbitrage; GMM tests (search for similar items in EconPapers)
Date: 2009-05
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Published in Conférence AFFI 2009, May 2009, Brest, France. 34 p

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00391286

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