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UWA Business School
Investors who use the volume of shares traded to predict the volatility of stock prices may have greater luck in a bear market than a bull market, new Australian research has found.

In a study published in Accounting and Finance, Associate Professor Marvin Wee and Associate Professor Joey Yang, from The University of Western Australia's Business School, examined the volatility-volume relationship in bull and bear markets.

While the volatility of both bull markets (characterised by generally rising prices and high investor confidence) and bear markets (characterised by decreasing prices and low investor confidence) were influenced by the total number of orders, the study found price volatility to be more sensitive to volume and the size of the order in a bear compared to a bull market.

‘It is likely that bear markets are more sensitive to these trading patterns due to the greater cost of short positions, the lack of liquidity and the differing trading strategies adopted in a bearish market,' explained Associate Professor Wee.

‘In our analysis of the bear market experienced during the global financial crisis of 2008, traders used smaller orders, both in terms of number of shares and in terms of dollar value.

‘One reason could be that in a bearish market with lower liquidity, traders are more likely to use smaller orders to minimise their market impact costs. Traders who continue to use large orders inevitably move prices and bear the consequence of market impact cost.'

The study also found important differences in the impact of different order sizes. In bull markets, orders of between 5,000 and 10,000 shares impacted most on price volatility. In bear markets, larger orders of over 10,000 shares had the greatest impact on volatility.

‘In bear markets, large orders tend to have a substantial market impact cost,' said Associate Professor Wee. ‘For example, a type of sell order known as stop loss orders can shield traders from excessive losses on a losing long position, however large stop loss orders have the potential of further driving prices downwards.'

The study used data from the S&P ASX50 index, collected between October 2006 and September 2008. It examined the specific effects on volatility of: total volume and order frequency; frequency of different order sizes; and order imbalance.

‘Order size, order imbalance and the volatility-volume relation in a bull versus a bear market' by Associate Professor Marvin Wee and Associate Professor Joey Yang was published in the March 2012 issue of Accounting and Finance.

Media references

Catherine Vogel (UWA Business School) +618 6488 7340
Verity Chia (UWA Business School) +618 6488 1346