The Stochastic Dependence of Security Price Changes and Transaction Volumes in a Model with Temporally Dependent Price Changes

Abstract

A model of security price behavior is presented, which allows for the observed temporal dependence in price changes from one transaction to the next and for the stochastic dependence between price changes and the numbers of shares traded. Tests of the model are conducted with data for corporate bonds and stocks. The results reveal some interesting differences in the two price processes.