Econometrica: Mar, 1983, Volume 51, Issue 2
The Price Variability-Volume Relationship on Speculative Markets
George E. Tauchen, Mark Pitts
This paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets. Our work extends the theory of speculative markets in two ways. First, we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day. And second, we determine how this joint distribution changes as more traders enter (or exit from) the market. The model's parameters are estimated by FIML using daily data from the 90-day T-bills futures market. The results of the estimation can reconcile a conflict between the price variability-volume elationship for this market and the relationship obtained by previous investigators for other speculative markets.