An examination of the complementary volume–volatility information theories

The volume–volatility relationship during the dissemination stages of information flow is examined by analyzing various theories relating volume and volatility as complementary rather than competing models. The mixture of distributions hypothesis, sequential arrival of information hypothesis, the dispersion of beliefs hypothesis, and the noise trader hypothesis all add to the understanding of how volume and volatility interact for different types of futures traders. An integrated picture of the volume–volatility relationship is provided by investigating the dynamic linear and nonlinear associations between volatility and the volume of informed (institutional) and uninformed (the general public) traders. In particular, the trading behavior explanation for the persistence of futures volatility, the effect of the timing of private information arrival, and the response of institutional traders to excess noise trading risk is examined. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:963–992, 2008