The Dark Side of Trading

Abstract

This study investigates the effect of high trading volume on observed stock volatility controlling for fundamental information. We investigate a number of settings, including two natural experiments (exchange-traded funds [ETFs] and dual-class shares), the aggregate time-series of U.S. stocks since 1926, and the cross-section of U.S. stocks during the last 20 years. Our main finding is that there is an economically substantial positive relation between trading volume and stock volatility, especially when trading volume is high. The conclusion is that stock trading can inject volatility above and beyond that based on fundamentals.