The impact of transaction duration, volume and direction on price dynamics and volatility

Abstract

We explore the role of trade volume, trade direction, and the duration between trades in explaining price dynamics and volatility using an Asymmetric Autoregressive Conditional Duration model applied to intraday transactions data. Our results suggest that volume, direction and duration are important determinants of price dynamics, while duration is also an important determinant of volatility. However, the impact of volume and direction on volatility is marginal after controlling for duration, and the impact of volume on volatility appears to be confined to periods of infrequent trading.

Keywords:

• Econometric theory
• Applied econometrics
• Econometrics of financial markets
• Forecasting ability

Acknowledgements

This paper, and its companion paper ‘Modeling transaction data of trade direction and estimation of probability of informed trading’, supersedes a previously circulated paper entitled ‘An autoregressive conditional marked duration model for transaction data’, which was presented at the First Symposium on Econometric Theory and Application (SETA), Taipei, 2005. We thank all who have commented on these papers, and, in particular, two anonymous referees for their very helpful comments.