Lead-lag relationships between trading volume and price variability: New evidence

✍ Scribed by Philip Garcia; Raymond M. Leuthold; Hector Zapata

• Publisher: John Wiley and Sons
• Year: 1986
• Tongue: English
• Weight: 668 KB
• Volume: 6
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990060102

✦ Synopsis

nterest has long existed among followers of commodity futures markets about the I relationship between trading volume and price variability. Critics of futures markets argue that increased trading vohme, especially by speculators, leads to increased price volatility. This can lead to greater uncertainty and less market efficiency, suggesting that regulatory limits curbing speculative positions and daily trading activities be established.

Others argue that increased price variability due to changing economic conditions attracts more trading, creating more market liquidity and leading eventually to less price volatility than if volume did not increase. This suggests that there be less regulation of traders and their activities.

In between these scenarios is the one where daily trading activity and price volatility increase and decrease simultaneously. That is, one activity does not necessarily lead or lag the other, but that they move up and down in concert as economic conditions change. A high degree of simultaneity between volume and price changes can indicate liquid and efficient markets where the response to new information is nearly instantaneous.