Asymmetric Relationships between Unexpected Trading Activity and Stock Market Volatility

This study finds support for an asymmetric relation between investors’ trading activity and stock return volatility. Ohk (2011) investigated relation between trading activity and stock market volatility in the emerging markets as well as the developed markets. This study extends one of Ohk (2011) by examining whether the market volatility responds symmetrically to trading activity shocks depending on whether volume is above or below its expected value across all countries. In the developed markets except for the United States, trading volumes above their expected level do not show any significant relationship between trading volumes and stock market volatility even though all market return volatilities are positively related to unexpected volumes. This study shows that there is a positive relationship between trading volume above the expected level and market volatility in the U.S.. In the emerging markets, Malaysia and Taiwan show positive relationships trading volumes above their expected level and market volatility. Indonesia shows a lower positive relationships trading volumes above the expected level and market volatility. Furthermore, in case market is highly volatile, whether the relations between volume shock and return volatility are different is examined.