Building a Stock Factor from Intraday Volatility-of-Volatility and Trading Activity

Summary

This research note develops an equity factor from intraday changes in volatility, which it treats as uncertainty about volatility. Using rolling five-minute windows of returns and volatility, it identifies periods when this uncertainty is elevated. It then measures how trading activity changes during those periods through the relationship between uncertainty and traded value, and through ratios of average traded value or volume in elevated-uncertainty periods to their intraday averages.

The proposed “clearing fog” factor combines these measures with a price-related difference between traded-value and volume ratios. The authors interpret that difference as a proxy for the liquidity cost of urgent selling, and adjust negative observations using their recent variability to distinguish persistent selling pressure from occasional shocks. In tests on Chinese A-shares from 2013 through July 2022, they report monthly cross-sectional results, including performance after neutralizing common style and industry effects and across major index universes. These are historical backtests, not proof of future returns; regime change and factor instability remain risks.

Key ideas

• The study defines volatility ambiguity as the rolling variability of short-window volatility estimates.\nIt measures activity during high-ambiguity periods using traded-value and volume ratios, as well as their correlation with ambiguity.\nThe gap between value and volume ratios is interpreted as a proxy for the price concession associated with urgent selling.\nA recent-variability adjustment is intended to separate persistent selling from isolated shocks.\nThe reported factor results are historical tests on Chinese equities and may not persist in future markets.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.