There's more to volatility than volume

It is widely believed that fluctuations in transaction volume, as
reflected in the number of transactions and to a lesser extent their size,
are the main cause of clustered volatility. Under this view bursts of
rapid or slow price diffusion reflect bursts of frequent or less frequent
trading, which cause both clustered volatility and heavy tails in price
returns. We investigate this hypothesis using tick by tick data from the
New York and London Stock Exchanges and show that only a small fraction of
volatility fluctuations are explained in this manner. Clustered volatility
is still very strong even if price changes are recorded on intervals in
which the total transaction volume or number of transactions is held
constant. In addition the distribution of price returns conditioned on
volume or transaction frequency being held constant is similar to that in
real time, making it clear that neither of these are the principal cause
of heavy tails in price returns. We analyse recent results of Ane and
Geman (2000: J. Finance, 55, 2259-2284) and Gabaix et al. (2003: Nature,
423, 267-270), and discuss the reasons why their conclusions differ from
ours. Based on a cross-sectional analysis we show that the long-memory of
volatility is dominated by factors other than transaction frequency or
total trading volume.