Abstract

This paper undertakes a fresh empirical investigation of key financial market variables and the theories that link them. We employ high frequency 5-minute data that include transaction price, trading volume, and the close bid and ask quote for the period May 5, 2004 through September 29, 2005. We document a number of regularities in the pattern of intraday return volatility, trading volume and bid-ask spreads. We are able to confirm the reverse J-shaped pattern of intraday bid-ask spreads with the exception of a major bump following the intraday auction at 13:05 CET. The aggregate trading volume exhibits L-shaped pattern for the German blue chip index, while German index volatility displays a somewhat reverse J-shaped pattern with two major bumps at 14:30 and 15:30 CET. Our empirical findings show that contemporaneous and lagged trading volume and bid-ask spreads have numerically small but statistically significant effect on return volatility. Our results also indicate asymmetry in the effects of volume on conditional volatility. However, inclusion of both measures as proxy for informal arrival in the conditional volatility equation does not explain the well known volatility persistence in intraday stock returns.

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