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CHAPTER 8: VOLATILITY IN U.S. AND EUROPEAN EQUITY MARKETS: AN ASSESSMENT OF MARKET QUALITY Deniz Ozenbas, Assistant Professor of Finance, Montclair State University Robert Schwartz, Speiser Professor of Finance, Zicklin School of Business, Baruch College, CUNY Robert Wood, Distinguished Professor of Finance, The University of Memphis 1. INTRODUCTION Volatility is like cholesterol – there is both good volatility and bad volatility. Good volatility characterizes price adjustments that are attributable to news. Bad volatility characterizes price changes that are attributable to transaction costs. Bad volatility is manifest in accentuated price swings, the runs and reversals that occur over relatively brief trading intervals in response to the arrival of buy and sell orders in the market. We suggest that an objective of market structure is to control bad volatility. However, it should also be recognized that, to some extent, short-run volatility must be accentuated so as to appropriately compensate liquidity providers (i.e., broker-dealer intermediaries and limit order traders). This paper examines the association between the accentuated intra- day price swings and market quality. To this end, we empirically This chapter is reprinted, with permission, from D. Ozenbas, R. Schwartz, and R. Wood, International Finance, Blackwell Publishers, Volume 5 Number 3, Winter
Published: Jan 1, 2005
Keywords: Price Change; Trading Cost; Price Discovery; Transaction Price; Market Impact
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