Intraday Volume — Volatility Relation of the DOW: A Behavioral Interpretation

In a recent article, Darrat et al. (2003) report results for the DJIA in which higher volume causes higher volatility without significant feedback. These empirical results have interesting behavioral interpretations. It is argued that the observed positive causality from volume to volatility supports overconfidence hypothesis over other alternatives, including Andreassen's (1990) salience hypothesis. The evidence suggests that investors suffer from a psychological error (overconfidence), inciting them to trade too aggressively and drive prices away from their fundamental values.