Qm
Statistics

Name the confounder: trading volume and volatility

confoundingcorrelationmarket-microstructure

Across trading days, a stock's daily trading volume and its daily volatility (size of the price move) are strongly positively correlated. A junior trader concludes: "Trading activity causes price swings, so if we throttle volume we can calm the stock down."

What third variable most plausibly drives both volume and volatility, making the causal claim suspect? Name it and explain.

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Partial and Semipartial CorrelationStale Prices and Nonsynchronous TradingAdjusted PIN and the Duarte-Young ModelBad Controls and Post-Treatment BiasBetting Against Correlation

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