TRANSACTIONS, VOLUME, AND VOLATILITY

We show that the positive volatility-volume relation documented by num erous researchers actually reflects the positive relation between vola tility and the number of transactions. Thus, it is the occurrence of t ransactions per se, and not their size, that generates volatility; tra de size has no information beyond that contained in the frequency of t ransactions. Our results suggest that theoretical research needs to en tertain scenarios in which (i) both the frequency and size of trades a re endogeneously determined, yet (ii) the size of trades has no inform ation content beyond that contained in the number of transactions.