Volatility, spread revision, volume, and the nature of information

The main objective of this study is to investigate the intraday relations among stock volatility, spread revision, trading volume and the nature of information, and to examine the sources of intraday price volatility. In the first part of this study, I analyze the NYSE market maker\u27s midquote volatility and bid-ask spread revision joint behavior, and its relations with the information content of trades during intraday 30-minute intervals. Empirical results show that the probability for the market maker to revise the bid-ask spread while maintaining the midquote is almost zero, and that the market maker tends to revise the midquote much more often than the bid-ask spread. Estimates from the bivariate ordered probit model show that the midquote volatility is strongly related to the net trading volume and signed trading imbalance; the bid-ask spread revision is strongly related to the absolute trading imbalance and percentage of NYSE volume. Both price volatility and bid-ask spread are significantly higher during the opening 30 minutes. The correlation of the midquote change and spread revision directions is significantly positive, and this correlation is higher for the infrequently traded stocks. The empirical results are consistent with predictions from both the inventory and information based models. In the second part of this study, I examine the contributions of public information shocks, noisy private information, and liquidity effects to the intraday price volatility using a structural model developed by Madhavan, Richardson, and Roomans (1997). The public information component is not significantly different from zero for most stocks, partly because the model is only able to estimate the net effect of all the public shocks during the sample period. Empirical results show a steady decrease in degree of asymmetric information and a monotonic increase in transactional cost component for all sample groups throughout the course of a trading day. On the other hand, the information asymmetry level is higher while the transaction cost component is lower for less frequently traded stocks at the transactional level. Finally, the asymmetric information and transaction cost components exhibit significant intraday variations and these variations are stronger for more frequently traded stocks