I’ve come across a few posts that discuss the relationship between volume and volatility. The argument is that when volume leaves a market, it becomes listless and quiet.
Seems plausible, but being skeptical, I wanted to test it.
Here is a plot of daily trading volume in SPY, the proxy for the S&P 500.
SPY Volume (20 day Simple Moving Average)
I’ve plotted the 20 (trading) day simple moving average. That smooths the plot and I use it to compare the daily volume to the moving average to get a measure of high volume or low volume.
As you can see, it has been rising since 2000. Since the volume has been rising, I compare the daily volume to the MA to see if the daily volume is high or low.
SPY Daily Volume (20 day Moving Average)
To measure the volatility, I take the daily range as a percent of the opening price.
SPY Daily Range
The correlation coefficient for the full time series, from 31st January 2000 to 29 June 2009 is 0.273; while for the smaller sample, 3rd January 2007 to 29 June 2009 it is 0.234. Pretty much the same.
Perfect correlation would be +1 and perfect anticorrelation would be -1. 0.27 is pretty good for financial time series. When I trimmed the outliers, the correlation for the full series went to 0.22. So the result is robust.
(You trim away the outliers, those points that are far away from the mass of points, because they have too large an influence on the correlation.)
The plot of the full time period looks like a solid mass, so I just plotted the shorter time period.
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