High Frequency Trading and Its Impact on the Swedish Stock volatility

University essay from Lunds universitet/Företagsekonomiska institutionen

Abstract: The existing studies have shown that the algorithmic trading has been playing an ever-increasing important role in both the U.S. and E.U. capital market. Many papers pay great attention on the high frequency trading, a special class of algorithmic trading, focusing on the impact that high-frequency activities have on the market quality. Investors engage in high frequency trading and interact with the market over millisecond horizons, resulting in a narrowed bid-ask spread, which, to some degree, abates the spurious volatility and autocorrelation in returns. Brogaard (2012) have already made some research on the causal link between the high frequency trading and volatility before and after the 2008 short selling ban. We follow his methodology by applying the differernce-in-difference-in-difference (DDD) approach and try to make a study about the impact of the high frequency trading on the stock volatility during the normal market condition and uncertainty period in the 2008 crisis. Our conclusion is that the high frequency trading could reduce the stock specific volatility in Swedish stock market.

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