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

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  • Müller, Christian
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.

Suggested Citation

  • Müller, Christian, 2012. "A new interpretation of known facts: The case of two-way causality between trading and volatility," Economic Modelling, Elsevier, vol. 29(3), pages 664-670.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:664-670
    DOI: 10.1016/j.econmod.2012.01.011
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    References listed on IDEAS

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    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F3 - International Economics - - International Finance
    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology

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