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Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models

F. Douglas Foster and S. Viswanathan
The Journal of Finance
Vol. 48, No. 1 (Mar., 1993), pp. 187-211
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328886
Stable URL: http://www.jstor.org/stable/2328886
Page Count: 25
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Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models
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Abstract

Patterns in stock market trading volume, trading costs, and return volatility are examined using New York Stock Exchange data from 1988. Intraday test results indicate that, for actively traded firms trading volume, adverse selection costs, and return volatility are higher in the first half-hour of the day. This evidence is inconsistent with the Admati and Pfleiderer (1988) model which predicts that trading costs are low when volume and return volatility are high. Interday test results show that, for actively traded firms, trading volume is low and adverse selection costs are high on Monday, which is consistent with the predictions of the Foster and Viswanathan (1900) model.

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