Relationship between Volatility and Volume in Shanghai Security Exchange Based on Vector Autoregressive Model

In stock market, a trader who has superior information exerts a persistent impact on share price. This paper studies the relationship between volatility and volume from July 1(st) 2003 to December 31(st) 2003, adopting vector autoregressive model (VAR) model and impulse response function. The method accounts for the effect of time duration and trade direction in examining their impact on volatility. In addition, serial dependence in volatility and volume is accommodated. The paper next examines the impact of one unexpected volume on volatility and the size of private information in trade. The paper shows the following results: volume has positive persistent impact on volatility; volume has positive autocorrelation; time covers information. One unexpected volume with information is absorbed by market needs about eleven trades, sixth-nine seconds. It will arouse 1.068 changes in volatility.