| This dissertation consists of two related chapters that study the dynamics of many key variables of the NYSE financial market. These variables include volatility, liquidity, the effective spread, and trading activity. Because investors and regulators are looking at these variables to make their investment decisions and regulation policies; they are the indicators of financial market quality. Since the current literature on stochastic volatility provides convincing evidence supporting that there are two factors in return volatility, both chapters employ a two-factor stochastic volatility model to capture the dynamics of stock return volatility. The first chapter studies and compares the dynamics of volatility and the effective spread in liquid versus relatively illiquid markets using the intraday stock return data. The chapter proceeds to explore how the models perform at the daily, weekly and monthly frequency levels in terms of capturing the unconditional distribution of the observed returns and find that the model does quite well at these frequencies. The second chapter utilizes the framework of two-factor stochastic volatility models to study the relationship between these two volatility factors and trading activity, whose representative variables are number of transactions and average trade size. |
