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An empirical study of volatility and trading volume of heterogeneity of traders using high-frequency data

Abstract This paper examines the dynamic relationship between volatility and trading volume using a vector autoregressive methodology. In this study the trading volume is classified into foreign investors, investment trust, and domestic dealer. By doing this the information used by three different groups of traders can be separated. This study found bidirectional causal relations between trading volume and volatility, which is in accordance with a sequential information arrival hypothesis, which suggests that lagged values of trading volume provide the predictability component of current volatility. Findings also reveal that foreign investors explain a large part of the variance in investment trust and dealers from the viewpoint of variance decomposition analysis. Meanwhile, the trading volume of investment trust accounts for a large portion of the variance in dealers. The foreign investors play an important role in explaining other types of traders’ behavior and directions.