Abstract: Blizzards in Manhattan, New York, NY cause a significant reduction in trading volume for firms located outside of the Northeast region of the United States of America. I use this exogenous change in volume to establish the causal relationship between volume and volatility. I find that the drop in volume causes a drop firms’ observed volatility. The effect is stronger post 2003 and NYSE’s implementation of “autoquote”, which led to an increase in trading volume from algorithmic traders. Our evidence suggests that trading activity by institutional investors (in of itself) increases volatility.
Abstract: Blizzards in Manhattan, New York, NY cause a significant reduction in trading volume for firms located outside of the Northeast region of the United States of America. I use this exogenous change in volume to establish the causal relationship between volume and volatility. I find that the drop in volume causes a drop firms’ observed volatility. The effect is stronger post 2003 and NYSE’s implementation of “autoquote”, which led to an increase in trading volume from algorithmic traders. Our evidence suggests that trading activity by institutional investors (in of itself) increases volatility.