Nonlinearity of the volume-volatility correlation filtered through the pointwise Hurst-H?lder regularity

We identify market inefficiency as a pivotal explanatory variable of the puzzling volume- volatility relationship. The result, that can bring together into a coherent framework many apparently conflicting findings, follows from translating the realized volatility into the corresponding pointwise Hurst-Holder exponent. This allows to measure, at any time t, markets' departures from the martingale property, i.e. from efficiency as stated by the Efficient Market Hypothesis. We find that when efficiency is not accounted for, a positive contemporaneous relationship emerges; conversely, it disappears as soon as efficiency is taken into account.(c) 2023 Elsevier B.V. All rights reserved.

Automated summary

This article identifies market inefficiency as a crucial variable in explaining the relationship between trading volume and volatility. By translating realized volatility into the corresponding pointwise Hurst-Holder exponent, the study measures the extent to which markets deviate from the martingale property, i.e. efficiency according to the Efficient Market Hypothesis. It is found that a positive contemporaneous relationship emerges when efficiency is not accounted for, but it disappears when efficiency is taken into account.